Professional Documents
Culture Documents
Availability
Availability of
of Close
Close Substitutes
Substitutes
Necessities
Necessities versus
versus Luxuries
Luxuries
Definition
Definition of
of the
the Market
Market
Time
Time Horizon
Horizon
Price
Price==$4
$4
Price
Price==$6
$6
Quantity
Quantity==120
120
Quantity
Quantity==80
80
From
FromPoint
PointAAto
toPoint
PointB:
B:Price
Pricerise
rise==50%
50%and
andQuantity
Quantityfall
fall==33%
33%
From
FromPoint
PointBBto
toPoint
PointA:
A:Price
Pricefall
fall==33%
33%and
andQuantity
Quantityrise
rise==50%
50%
Demand
E=0
$5.00
$4.00
1. An increase
in price
100
2. leaves the quantity demanded unchanged.
Quantity
Demand
E<1
$5.00
$4.00
1. A 22%
increase in
price
90
100
Quantity
Price
Demand
$5.00
$4.00
1. A 22%
increase in
price
80
100
Quantity
Price
Demand
$5.00
$4.00
1. A 22%
increase in
price
50
100
Quantity
Price
Demand
$4.00
2. At exactly $4, consumers will buy any quantity.
0
Quantity
$4.00
P x Q = $400
(revenue)
Demand
100
Quantity
$3.00
P x Q = $400
(revenue)
$1.00
P x Q = $100
(revenue)
0
Demand
80
100
Quantity
$5.00
$4.00
Demand
Revenue = $200
Revenue = $100
20
50
Quantity
Elasticity
is larger
than 1.
7
6
5
4
Elasticity
is smaller
than 1.
3
2
1
10
12
14
Quantity
Percentage change
in quantity demanded
Income elasticity of demand =
Percentage change
in income
Percentage change
in quantity supplied
Price elasticity of supply =
Percentage change in price
using
usingthe
themidpoint
midpointmethod,
method,we
wecalculate
calculatethe
thepercent
percentchange
changein
in
the
price
as
(2.10
1.90)
/
2.00
x
100
=
10%
the price as (2.10 - 1.90) / 2.00 x 100 = 10%
Similarly,
Similarly,we
wecalculate
calculatethe
thepercent
percentchange
changein
inthe
thequantity
quantitysupplied
supplied
as
(11
000
9000)
/
10
000
x
100
=
20%
as (11 000 - 9000) / 10 000 x 100 = 20%
20%
10%
2.0
Supply
E=0
$5.00
$4.00
1. An increase
in price
100
2. leaves the quantity supplied unchanged.
Quantity
Supply
E<0
$5.00
$4.00
1. A 22%
increase in
price
100
110
Quantity
Price
Supply
$5.00
$4.00
1. A 22%
increase in
price
100
125
Quantity
Price
Supply
$5.00
$4.00
1. A 22%
increase in
price
100
200
Quantity
Price
Supply
$4.00
2. At exactly $4, producers will supply any quantity.
0
Quantity
$15
Elasticity is less
than 1
$12
Elasticity is
greater than 1
$4
$3
100
200
500
525
Quantity
Good
Good news
news bad
bad news
news for
for farmers
farmers
OPEC
OPEC
Drugs
Drugs and
and crime
crime
Increase in Supply
1. When demand is inelastic, an
increase in supply
S1
S2
$3
$2
2. leads
to a fall in
price
Demand
100
110
Quantity of Wheat
S2
S1
S2
S1
P2
P2
P1
P1
2. leads
to a large
increase in
price
Demand
2. leads
to a small
increase in
price
Quantity of Oil
Demand
Quantity of Oil
Price of
Drugs
S2
S1
Supply
P2
P1
P2
P1
D1
2. which
reduces the
price
2. which
raises the
price
D2
Demand
Q2
Q1
Quantity of Drugs
Q2
Q1 Quantity of Drugs
Summary
Price
Priceelasticity
elasticityof
of demand
demandmeasures
measureshow
how much
much
the
thequantity
quantitydemanded
demandedresponds
respondsto
tochanges
changesin
in
the
theprice.
price.
Price
Priceelasticity
elasticityof
of demand
demandis
iscalculated
calculated as
as the
the
percentage
percentagechange
changein
in quantity
quantitydemanded
demandeddivided
divided
by
bythe
thepercentage
percentagechange
change in
in price.
price.
IfIf aademand
demandcurve
curveis
iselastic,
elastic, total
totalrevenue
revenuefalls
falls
when
whenthe
theprice
pricerises.
rises.
IfIf ititis
isinelastic,
inelastic, total
totalrevenue
revenuerises
risesas
asthe
theprice
price
rises.
rises.
Summary
The
Theincome
incomeelasticity
elasticityof
ofdemand
demandmeasures
measureshow
how
much
muchthe
thequantity
quantitydemanded
demandedresponds
respondsto
to
changes
changesin
in consumers
consumersincome.
income.
The
Thecross-price
cross-priceelasticity
elasticityof
of demand
demandmeasures
measures
how
how much
muchthe
thequantity
quantitydemanded
demanded of
of one
onegood
good
responds
respondsto
tothe
theprice
priceof
of another
anothergood.
good.
The
Theprice
priceelasticity
elasticityof
of supply
supplymeasures
measureshow
how
much
muchthe
thequantity
quantitysupplied
supplied responds
responds to
to changes
changes
in
inthe
theprice.
price.
Summary
In
Inmost
mostmarkets,
markets,supply
supplyis
ismore
moreelastic
elasticin
in the
the
long
longrun
runthan
thanin
inthe
the short
short run.
run.
The
Theprice
priceelasticity
elasticityof
of supply
supplyis
iscalculated
calculatedas
asthe
the
percentage
percentagechange
changein
in quantity
quantitysupplied
supplied divided
divided
by
bythe
thepercentage
percentagechange
change in
in price.
price.
The
Thetools
toolsof
ofsupply
supplyand
anddemand
demandcan
canbe
beapplied
applied in
in
many
manydifferent
differenttypes
types of
of markets.
markets.
The End