Micro 6

2. Microeconomics

3. Opening
Prayer

4. Quiz
1. Name two goods that are complements.
2. Name two goods that are substitutes.

5. Quizmaster
10 questions
4 answers
email to
mckytee@go.byuh.edu
1 Extra Credit Point

6. Four Elasticities
Elasticity of Demand
Cross-Price Elasticity
Elasticity of Income
Elasticity of Supply

7. Process
Identify which elasticity
Calculate the coe
ffi
cient
Compare to the benchmark

8. ELASTICITY EQUATION BENCHMARK
Price
Demand
Cross-
Price
Income
Price
Supply
MPF
Inelastic | Elastic
1
Complements | Substitutes
0
Inferior | Normal | Luxury
0 1
Inelastic | Elastic
1
%∆QD
%∆QD1
%∆P
%∆P2
%∆QD
%∆I
%∆QS
%∆P
∆Q
∆P
Q
P
x

9. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price
7
4
1.75
Midpoint Formula
∆Q
Q ∆P
P
x
2
4 1
3.5
x

10. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Gasoline
Price

11. $0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
3 4.5 6
Gallons - Gasoline
Price

12. Scales can be deceptive

13. What determines
Price Elasticity of
Demand?

14. Close Substitutes
Passage of Time
Luxuries vs. Necessities
De
fi
nition of Market
Share of Budget

15. Close Substitutes
Elastic >1
Inelastic <1

16. Passage of Time
More Time
More Elastic

17. Luxuries vs. Necessities
Elastic Inelastic

18. De
fi
nition of Market
Elastic Inelastic
Demand for Gasoline
in General
Demand for Gasoline
in Rexburg

19. Share of the Budget
Elastic
Inelastic
Small Large

20. Price Elasticity
and
Total Revenue

21. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Gasoline
Price
$6.00 x 4 = $24
$3.00 x 5 = $15
Inelastic (<1)
Raising prices
will increase
total revenue
Net Gain = $9
Lose
Gain
Total Revenue
TR = P x Q

22. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Ice Cream
Price
$4.00 x 3 = $12
$3.00 x 5 = $15
Elastic (>1)
Raising prices
will decrease
total revenue
Net Gain = -$3
Lose
Gain
Total Revenue
TR = P x Q

23. Cross-Price
Elasticity of Demand

24. Cross-Price
Elasticity of Demand
Percentage Change in Quantity
Demanded of one good
Percentage Change in Price
of another good
%
%
QD
P
1
2

25. Cross-Price
Elasticity of Demand
0
Substitutes
Compliments
<0 >0
1. Calculate Elasticity
2. Compare to benchmark of 0

26. %
%
QD1
P2
35%
50%
=.7 >0
Substitutes

27. %
%
QD1
P2
-40%
50%
=-.8 <0
Complements

28. Cross-Price
Elasticity of Demand
0
Substitutes
Compliments
<0 >0
%
%
QD
P
1
2

29. Income
Elasticity of Demand
Normal, Inferior, or Luxury?

30. Percentage Change in
Quantity Demanded
Percentage Change in Income
Income
Elasticity of Demand
%
%
QD
I

31. Income
Elasticity of Demand
0
Luxury
Inferior
<0 >1
1. Calculate Elasticity
2. Compare to benchmark of 0 and 1
1
Normal

32. %
%
QD
I
10%
20%
=.5
>0
<1
Normal

33. %
%
QD
I
-50%
20%
=-2.5 <0
Inferior

34. %
%
QD
I
100%
20%
= 5 >1
Luxury

35. Income
Elasticity of Demand
0
Luxury
Inferior
<0 >1
1
Normal
%
%
QD
I

36. Price Elasticity
of Supply

37. Price Elasticity of Supply
%
%
QS
P
Percentage Change in
Quantity Supplied
Percentage Change in Price

38. Price Elasticity of Supply
1
Elastic
Inelastic
<1 >1
1. Calculate Elasticity
2. Compare to benchmark of 1

39. 1. Prices increase from $5.00 to $6.00.
Quantity demanded decreases from 100
units to 80 units.
What is the price elasticity of demand?
What is the total revenue at $5.00 per unit?
What is the total revenue at $6.00 per unit?
2. If I increase prices from $20 to $25,
quantity demanded decreases from 1,000
units to 900 units. Should I raise prices?
Why?
3. Prices increase from $10 to $15 for
product A. Quantity demanded for product B
increases from 500 units to 600 units
What is the cross-price elasticity of
demand? Are these products compliments
or substitutes?
4. Prices increase from $10 to $15 for
product C. Quantity demanded for product B
decreases from 40 units to 30 units
What is the cross-price elasticity of
demand? Are these products compliments
or substitutes?
5. Your income increase from $10 to $15 per
hour. Quantity demanded for product E
decreases from 20 units to 15 units
What is the income elasticity of demand? Is
this product an inferior, normal, or luxury
good?
6. Your income decreases from $12 to $10
per hour. Quantity demanded for product F
increases from 10 units to 12 units
What is the income elasticity of demand? Is
this product an inferior, normal, or luxury
good?
Elasticity Quiz