Going to try and tackle some economics today. Should be a lot of review. Schweser starts with Micro and then moves to Macro.
Elasticity
- Measure of the ratio of a percentage change of one variable to the percentage change of another
- Usually used in context of change in Q demanded to change in price
- NOTE: must use AVERAGE values to calc percent change
- (ending - beginning) / ((ending + beginning)/2)
- This makes it so a change from 8 to 10 is the same as from 10 to 8
- Pefectly elastic = horizontal (infinite elasticity)
- Inelastic = vertical (0 elasticity)
- If absolute value of elasticity < 1, inelastic
- Availability of substitutes: fewer substitutes = less elastic
- Relative amount of income spent on good: lower = less elastic (toothbrushes and automobiles)
- Time since price change: Elasticity of demand is greater in long run than short run
- Change in response of a good in response to change in price in a substitute or compliment
- Substitutes -> cross elasticity is positive, Complements -> negative
Income elasticity of demand = % change Qdemanded / % change in income
- Negative -> inferior goods (bus travel, generic margarine) - Qd decreases as income increases
- Positive -> normal good
- 0-1 are considered necessities
- >1 are considered luxury items
Elasticity of supply = % change Qsupplied / % change in price
- Factors that affect
- Available resource substitutions
- Supply decision timeframe (from least to most elastic)
- Momentary supply: change in Qs immediately following price change
- Short term supply: changes to supply curve shape as Qs changes
- More elastic the longer the period - less workers, machines, etc.
- Long term supply: Shape of supply curve after all possible adjustments employed
- New factories, distribution systems
Elasticities on a straight line demand curve
- Pick midpoint of 2 Qs and Ps and calc the elasticity
- Note that elasticity changes as you go along demand curve, and elasticity is NOT just the slope of the demand curve
- Total revenue test: total revenue is P*Q
- If increase in price increases total rev (and vice versa), demand is inelastic
- If opposite, elastic
End of elasticity
9:30
0.5 hour
Do Schweser notes start from Elasticity for micro? CFAI doesn't; has the demand, supply, market equilibrium, consumer surplus, and producer surplus primer before that.
ReplyDeleteYes, Schweser starts with elasticity (though I am using a version from 2009 - may have changed since then).
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