ECON MICRO REVIEW

MR. CASTANEDA
Economics, McConnell Brue Flynn, McGraw-Hill Education

MARKET EQUILIBRIUM
Government intervention
PRICE CEILINGS

PRICE FLOOR

Sets the maximum legal price a

seller may charge

Sets the minimum price a seller

may charge

To be effective set it below Eq. P

To be effective set it above Eq. P

Causes shortages Excess Demand Causes surplus Excess Supply

A price at or below the ceiling is
legal

A price at or above the price

floor is legal

MARKET EQUILIBRIUM SUMMARY

Both productive and allocative efficiency occur at market
equilibrium, where products are produced in the least costly ways,
and the mix of goods and services are highly prized by society.
Government controlled prices in the form of ceilings and floors
disrupt the rationing function of prices, distorts resources
allocations, and can have negative side effects.

PRICE ELASTICITY:
Extends our understanding of markets by letting us
know the degree to which changes in prices and
incomes affect supply and demand.

PRICE ELASTICITY OF DEMAND

measures the responsiveness of consumers to a price
change. AKA elasticity coefficient.
=

The averages of the 2 prices and 2 quantities are used as

the base references in calculating the percentage changes

THREE CASES
ELASTIC DEMAND > 1
Given: 2% decline in price of flowers results in 4% increase in quantity
demanded
=

.04
.02

=2

Notice = 2 > 1; , .
This implies consumers are sensitive to the price change of flowers

THREE CASES
INELASTIC DEMAND < 1
Given: 2% decline in price of coffee results in 1% increase in quantity
demanded
=

.01
.02

= .5

Notice = .5 < 1; , .
This implies consumers are not sensitive to the price change of coffee

THREE CASES
UNIT ELASTIC DEMAND = 1
Given: 2% decline in price of chocolates results in 2% increase in
quantity demanded
=

.02
.02

=1

Notice = 1 = 1; , .

Total Revenue
=

Total Revenue Test

PERFECT INELASTIC/ELASTIC DEMAND

MORE GRAPHS AND ELASTICITY COEFFICIENTS

> 1

= 1

< 1

= 0

PRICE ELASTICITY OF DEMAND: SUMMARY

Type of Demand

Change in Price

Change in Qt.

Effect on TR

Elastic

Price

Qt.

TR

Elastic

Price

Qt.

TR

Inelastic

Price

Qt.

TR

Inelastic

Price

Qt.

TR

EASIER TO MEMORIZE
Type of Demand

Change in Price

Effect on TR

Elastic

Price

TR

Elastic

Price

TR

Inelastic

Price

TR

Inelastic

Price

TR