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{{Economics_Lectures}}

{{Economics_Lectures}}

This Lecture we will review the basic concept of "elasticity", learn about the differences between the short run and the long run, and then study the powerful Coase theorem.  You’ll find those topics interesting and helpful.

In this Lecture we will review the basic concept of "elasticity", learn about marginal cost and marginal revenue, and then study the powerful Coase theorem.  You’ll find these topics interesting and helpful.

By now you may have noticed that there is a style to economics:  simple concepts are studied very carefully.  Patience is valuable in solving economic problems carefully.  Unlike history or even math, it helps in economics to be very careful when initially considering a problem.  Haste or sloppiness can lead to unnecessary mistakes.   

By now you may have noticed that there is a style to economics:  simple concepts are studied very carefully.  Patience is valuable in solving economic problems.  Unlike history or science, it helps in economics to be extremely careful when '''''first considering''''' a problem.  Haste or sloppiness at the outset of trying to solve a problem can lead to unnecessary mistakes.   

In fact, we could define economics based on its unique style:  economics consists of making simple observations about complex situations in order to derive powerful results.  There may be many things that are unknown or uncertain about a situation, but economics looks at what can be determined and then derives as much as possible from what is known.  For example, one might ask an economist what he can say about public school classes.  Most people might respond, "I can't say anything about them without knowing more information."  But an economist thinks about what can be said despite the lack of knowledge of all the details.  The economist might say that we do this this:  public school classes avoid prayer and discussion of the Bible.  From that simple observation, an economist might draw powerful conclusions:  students are missing out on the central source of wisdom and comfort.

In fact, we could define economics based on its unique style:  economics consists of making simple observations about complex situations in order to derive powerful results.  There may be many things that are unknown or uncertain about a situation, but economics looks at what can be determined and then derives as much as possible from what is known.  For example, one might ask an economist what he can say about public school classes.  Most people might respond, "I can't say anything about them without knowing more information."  But an economist thinks about what can be said despite the lack of knowledge of all the details.  The economist might say that we do know this:  public school classes censor prayer and avoid discussion of the Bible.  From that simple observation, an economist might draw a powerful conclusion:  students are completely missing out on the central source of wisdom and comfort.  Put another way, I do not know what students are doing in a typical public school classroom, but I do know that they are not learning anything related to the Bible.  And that observation is worth making, because the Bible has been the starting point and inspiration for most of the great achievements.

== Review: Elasticity ==

== Review: Elasticity ==

In Lecture 3 we learned about "elasticity".  Let's define it again:  '''elasticity is the responsiveness of demand for a particular good due to changes in a variable such price or income'''. There is also an elasticity of supply of a particular good that we'll mention below.

In Lecture 3 we learned about "elasticity".  Let's define it again:  '''''elasticity is the responsiveness of demand for a particular good due to changes in a variable such price or income'''''.<ref>There is also an elasticity '''''of supply''''' of a particular good that we'll mention below.</ref>

The concept of elasticity is worth learning well.  Many questions on an economics exam (such as the CLEP) ask about elasticity.  If you can know elasticity inside and out then you'll have a big advantage on an economics exam.

The concept of elasticity is worth learning well.  Many questions on an economics exam (such as the CLEP) ask about elasticity.  If you can know elasticity inside and out then you'll have a big advantage on an economics exam.

Most of the time elasticity means elasticity of '''''demand''''', as defined above.  We have learned two types of elasticity of demand:

Most of the time elasticity means elasticity of '''''demand''''', as defined above.  We have already learned two types of elasticity of demand:

*price elasticity of demand

*price elasticity of demand

=== Price Elasticity ===

=== Price Elasticity ===

''''Price''''' elasticity of demand is the change in the quantity demanded by the public for a particular good due to a change in its '''''price'''''.  Its symbol is "Ped", for "Price elasticity of demand."  This term answers this question:  if the price of gasoline increases, how does the demand for gasoline change?  It decreases due to the Law of Demand, but the '''''price elasticity'''' tells us '''''how much''''' it decreases due to a price increase.  Specifically, price elasticity is the percentage change in quantity demanded, divided by the percentage change in the price of the good.  If the percent change in quantity demanded is more than the percent change in price, then the good is considered "elastic".  If the percent change in quantity demanded is less than the percent change in price, then the good is considered "inelastic".  The Law of Demand means that price elasticity is always negative, but for convenience everyone uses the absolute value (positive value) without the minus sign.

'''''Price''''' elasticity of demand is the change in the quantity demanded by the public for a particular good due to a change in its '''''price'''''.  Its symbol is "Ped", for "Price elasticity of demand."  This term is used to answer this question:  if the price of gasoline increases, how does the demand for gasoline change?  It decreases due to the Law of Demand, but the '''''price elasticity'''' tells us '''''how much''''' it decreases due to a price increase.  Specifically, price elasticity is the percentage change in quantity demanded, divided by the percentage change in the price of the good.  If the percent change in quantity demanded is more than the percent change in price, then the good is considered "elastic".  If the percent change in quantity demanded is less than the percent change in price, then the good is considered "inelastic".  The Law of Demand means that price elasticity is always negative, but for convenience everyone uses the absolute value (positive value) without the minus sign.

Price elasticity of demand is important because it tells us whether the owner's

Price elasticity of demand is important because it tells us whether the owner's