Transcript Micro Ch 18- presentation 3 Short Run Long Run and Efficiency-0

Short Run, Long Run and
Efficiency
Micro Chapter 18
Cross Elasticity of Demand
• Measures how sensitive consumer
purchases of one product are to a change
in price of another product
• Exy = Percentage change in Q demanded x/
Percentage change in price of Y
Substitute Goods
• If Cross elasticity is > 0, x and Y are
substitutes
• Ex- price of Coke goes up, more Pepsi is
purchased
Complements
• Cross elasticity < 0, X and Y are
complements
• An increase in the price of X causes a
decrease in the demand for Y
• Ex- increase in the price of digital cameras
leads to a decrease in the demand of
memory cards
Independent Goods
• Zero or near zero cross elasticity means
the items are unrelated
• Ex- walnuts and plums
Uses of Cross-Elasticity
• Government uses cross elasticity when
deciding whether mergers will violate antitrust laws
Income Elasticity of Demand
• Ei = % change in quantity demanded/ % change
in income
• Measures the degree to which consumers
respond to a change in income in buying more
or less of a particular good
Normal (Superior) Good
• Ei > 0
• More demand as income increases
• Ex- cars, vacation, electronics
Inferior Goods
• Ei < 0
• Consumers decrease their purchases of
inferior goods as income goes up
• Ex- Ramen Noodles, retread tires
Consumer Surplus
• The difference between the amount
consumer(s) are willing to pay and equil $
Consumer
Surplus
Equilibrium
Price = $8
Producer Surplus
• Difference between the actual price a
producer receives and the min. acc. price
Price (Per Bag)
S
Equilibrium
Price = $8
P1
Producer
Surplus
Efficiency
S
Price (Per Bag)
Consumer
Surplus
Equilibrium
Price = $8
P1
Producer
Surplus
D
Q1
Quantity (Bags)
Efficiency/Deadweight Loss
• Reductions of combined consumer and
producer surpluses associated with
underproduction or overproduction
• Quantities < or > Q1
Efficiency Loss
S
Price (Per Bag)
Efficiency
Losses
P1
D
Q2
Q1
Q3
Quantity (Bags)