I2M: Chapter 3 / 4

• Extensive margin: Newspapers: as the price goes down the number of people willing to purchase a newspaper increases (each buyer buys at most one unit).
• Intensive margin: Soda Cans: as the price goes down individuals are willing to purchase more units
• Both of the above: As the price of cans goes down more people buy sodas and some buyers buy more units as well.

• Input prices
• Technology
• Number and scale of sellers
• Sellers’ expectations about the future

• Extensive margin: as the price for a smartphone goes up the number of students willing to sell theirs increases (each seller sells at most one unit)
• Intensive margin: as the price for a smartphone goes up the producers each produce and sell more units
• Both of the above: When the price goes up more competitors enter the market and certain sellers sell more units.

The variable b is taken from the curve: Q = a-bP

If the elasticity is greater than 1, then demand is said to be elastic (ex: olive oil --> many alternatives). If the elasticity is infinite, then demand is perfectly elastic.

If the elasticity is smaller than 1, then demand is said to be inelastic (ex: cigarettes --> addictive product). If the elasticity is zero, then demand is perfectly inelastic.

If the elasticity is equal to 1, then demand is said to be unit-elastic.

\(P=\frac{a}{2b}\)

The variables are taken from the curve: Q = a-bP

\(Cross\ price\ elasticity=\frac{Percentage\ change\ in\ quantity\ demanded\ of\ good\ x}{Percentage\ change\ in\ price\ of\ good\ y}\)

\(Income\ elasticity=\frac{Percentage\ change\ in\ quantity\ demanded}{Percentage\ change\ in\ income}\)

1. Expenditure share of food products falls as income rises.
2. Expenditure share of clothing, lighting, heating and housing is independent of income.
3. Expenditure shares on education, health and leisure increases as incomes rise.

Elasticity of supply will be greater:

• The more inventory the firm has
• The more easily the firm can hire workers
• The longer the time horizon