Elasticity and Efficiency
Unit 2 reviews extend the discussions of supply and demand by including elasticity, which extends our understanding of markets by letting us know the degree to which changes in prices and income affect supply and demand sides of the market. Elasticity discusses a number of applications and presents empirical estimates for a variety of products. Cross elasticity and income elasticity of demand and price elasticity of supply will be addressed.
The unit also examines economic efficiency by analyzing market failures, public sector failures, and the failures of public decisions to promote the general economic welfare. The market failures will highlight both the demand side and supply side market failures due to public goods and externalities, and their effects on consumer and producer surplus. Government failures, which lead to economically inefficient outcomes in the public sector, will be discussed by focusing on their causes and their impacts on the economic welfare.