Short Run, Long Run and Efficiency

1. Short Run, Long Run and Efficiency Micro Chapter 18

2. 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

3. Substitute Goods • If Cross elasticity is > 0, x and Y are substitutes • Ex- price of Coke goes up, more Pepsi is purchased

4. 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

5. Independent Goods • Zero or near zero cross elasticity means the items are unrelated • Ex- walnuts and plums

6. Uses of Cross-Elasticity • Government uses cross elasticity when deciding whether mergers will violate anti-trust laws

7. 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

8. Normal (Superior) Good • Ei > 0 • More demand as income increases • Ex- cars, vacation, electronics

9. Inferior Goods • Ei < 0 • Consumers decrease their purchases of inferior goods as income goes up • Ex- Ramen Noodles, retread tires

10. Consumer Surplus • The difference between the amount consumer(s) are willing to pay and equil $ Consumer Surplus Equilibrium Price = $8

11. Producer Surplus • Difference between the actual price a producer receives and the min. acc. price S Equilibrium Price = $8 P1 Price (Per Bag) Producer Surplus Q1

12. Efficiency S Consumer Surplus Equilibrium Price = $8 P1 Price (Per Bag) Producer Surplus D Q1 Quantity (Bags)

13. Efficiency/Deadweight Loss • Reductions of combined consumer and producer surpluses associated with underproduction or overproduction • Quantities < or > Q1

14. Efficiency Loss S Efficiency Losses P1 Price (Per Bag) D Q3 Q2 Q1 Quantity (Bags)