Elasticity and Its Applications PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

Size: px
Start display at page:

Download "Elasticity and Its Applications PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD"

Transcription

1 Elasticity and Its Applications PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

2 Introduction This is the first of 4 chapters that comprise the middle of this course. These chapters are extensions to the Supply and Demand model. Elasticity: quantifying how sensitive quantity demanded and quantity supplied are. To price. To incomes. To prices of related goods. The Laws of Supply and Demand only say the direction of the relationship between Q and P. Nothing about the magnitude. Elasticity is about measuring this. How sensitive are they?

3 Elasticity defined Elasticity: a numerical measure of how responsive QQ DD or QQ SS is to one of the factors that determine it. Examples, 1. Price Elasticity of Demand 2. Price Elasticity of Supply 3. Income Elasticity of Demand 4. Cross Price Elasticity of Demand

4 Symbolic definitions of elasticity 1. Price Elasticity of Demand (good x) 2. Price Elasticity of Supply 3. Income Elasticity of Demand 4. Cross Price Elasticity of Demand EE PPyy,QQ DD = EE PPxx,QQ DD = % QQ DD % PP xx EE PPxx,QQ SS = % QQ SS % PP xx EE II,QQDD = % QQ DD % II % QQ DD % PPPPPPPPPP oooo ooooooooo gggggggg

5 Illustration Initially the price is $40/unit. The quantity demanded is 100. How does quantity demanded change in each case when the price rises to $50/unit? In both cases, we are raising price by the same amount.

6 Go to Hotseat, buddy.

7 Which curve is more sensitive? Both elasticity calculations have the same % change in price % PP = 100 = 25% 40 The flatter curve decreases quantity demanded by: = 80 pppppppppppppp. 100 The steeper curve decreases quantity demanded by: = 5 pppppppppppppp. 100 The two elasticity calculations are: 80 5 = 3.2 and = 0.2, which reveals that the flatter curve is more elastic. The larger negative effect means it is more sensitive.

8 Really cool mathematical note The terms in the Elasticity definition can be cleverly re-written, EE PPxx,QQ DD = QQ 1 QQ 0 PP 0. PP 1 PP 0 QQ 0 As the price change becomes infinitely small, so does the quantity response. But the ratio of the two changes approaches the (inverse of the) slope of the demand curve: QQ PP. So you can write elasticity: EE PPxx,QQ DD = QQ PP PP 0 QQ 0, where QQ PP is the inverse of the slope of the demand curve at the point, (QQ 0, PP 0 ).

9 The midpoint method for calculating elasticity Maybe you didn t think that mathematical note was as cool as I did. But here s why it s useful. Calculating elasticity at one point is less confusing that calculating it based on two endpoints. Even when you are given two endpoints, you can calculate the elasticity based on the midpoint between them. It s less confusing because you don t have to choose which endpoint to use as the base when you re calculating % change. According to the midpoint method, the effect of changing the price (on a linear demand curve) could be calculated as: EE PPxx,QQ DD = PP mmmmmmmmmmmmmmmm QQ mmmmmmmmmmmmmmmm 1 ssssssssss oooo dddddddddddd cccccccccc.

10 The midpoint method (continued) Using the midpoint eliminates the following confusion. Say you have a linear demand curve that goes through the points: Price $7, Quantity 3 and Price $8 and Quantity 2. Elasticity would be sensitive to the base and would depend on which end point was the starting point. 3 2 EE PPxx,QQ DD = 3 = or EE PP xx,qq DD = 2 = 4? Using the midpoint is independent of the starting point, though. EE PPxx,QQ DD = = 3.

11 Sensitivity to price To illustrate sensitivity to price, consider two extreme examples. This example uses supply, but the concepts of perfectly elastic and perfectly inelastic apply equally to demand. Perfectly inelastic means not at all sensitive. EE PPxx,QQ SS = PP mmmmmmmmmmmmmmmm QQ mmmmmmmmmmmmmmmm 1 = 0 Perfectly elastic means infinitely sensitive. EE PPxx,QQ SS = PP mmmmmmmmmmmmmmmm QQ mmmmmmmmmmmmmmmm 1 0 =

12 Perfect elasticity and perfect inelasticity When supply or demand is perfectly elastic, quantity is so sensitive to price that even a small change would make the quantity response infinitely large. When it is perfectly inelastic, quantity is completely insensitive to price changes and doesn t respond at all. These are the two extreme ends of the elasticity spectrum. What determines where a particular demand (supply) curve will fall on this spectrum?

13 Determinants of elasticity Demand is more elastic under the following circumstances. Availability of close substitutes. When the good is defined specifically rather than broadly. When the good is a luxury rather than a necessity. In the long run rather than the short run. Supply is more elastic under the following circumstances. When producers are able to adjust their output easily. In the long run rather than the short run. Producers can change the scale of their production.

14 What the other elasticity measures tell you about demand Income elasticity can tell you whether a good is: Normal, A luxury, Inferior. Cross price elasticity can tell you whether two goods are substitutes or complements.

15 Normal, luxury, inferior A 1% increase in consumers incomes can generate one of the following changes in QQ DD. An increase of 0-1% An increase of >1% A decrease in QQ DD The first is a case of a normal good; when consumers incomes rise they spend more money on the good in question and the quantity demanded increases. The increase is roughly that good s share in the consumers budget, so 0 EE PPxx,QQ DD 1. The second is a case of a luxury good; consumers make proportionally larger demands than the size of the income increase. The share of this good in the budget increases as well as the budget, itself. Last is an inferior good; when consumers get more income, they substitute away from it and demand less.

16 Substitutes and complements When the price of another good changes and the demand for the good in question changes, the goods are related. Quantity demanded increases when: The price of a complement decreases, or the price of a substitute increases. Quantity demand decreases when: The price of a complement increases, or the price of a substitute decreases. So what is the sign on cross price elasticity?

17 Substitutes and complements (continued) Cross price elasticity for a complement? % QQ DD EE PPyy,QQ DD = % PPPPPPPPPP oooo ooooooooo gggggggg = + < 0 The price of the other good goes up and you demand less of both (because they go together). Cross price elasticity for a substitute? % QQ DD EE PPyy,QQ DD = % PPPPPPPPPP oooo ooooooooo gggggggg = + + > 0 The price of the other good goes up and you demand less of it (and more of this).

18 Substitutes and complements (concluded) Complements are goods that are consumed together, so prices of complements are inversely related to demand. A negative cross price elasticity indicates complementary goods. Substitutes are goods that are perceived as alternatives to each other. The prices of substitutes are positively related to demand. A positive cross price elasticity indicates that the two goods are substitutes.

19 Applications of Elasticity ECON 210: PRINCIPLES OF ECONOMICS

20 Pricing a good to maximize revenue Imagine you are managing a firm that produces some good that has very low marginal cost. Scalable products like software downloads, subscriptions to periodicals, or streaming media services are good examples. You are tasked with finding the price that will make your company the most revenue. And with near zero variable costs, the most profit, too! Revenue can be shown with ease on a graph of a demand curve. Revenue is just the price multiplied by the quantity demanded.

21 Pricing a good to maximize revenue (continued) As it turns out, the price shown on the previous slide is the revenue-maximizing one. You can confirm this with trial and error by trying other prices. If your current price is $80/unit, you could raise revenue by decreasing price. If your current price is $10/unit, you could raise revenue by increasing price.

22 Revenue and elasticity Revenue changes as the price changes. Because of two opposing forces. Cutting (raising) the price tends to decrease (increase) revenue. But cutting price increases sales (quantity), and the quantity change goes in the opposite direction because of the Law of Demand. The effect on revenue depends simply on which force is bigger. % Revenue = % PP xx + % QQ DD, and demand elasticity is EE PPxx,QQ DD = % QQ DD EE % PP PPxx,QQ DD % PP xx = % QQ DD. xx So, combining these two yields: % Revenue = % PP xx 1 + EE PPxx,QQ DD. The effect of a price change depends crucially on the demand elasticity.

23 An elasticity-based pricing strategy To be concrete, consider 10% price changes. We know that when the price is too high, e.g., above $60/unit, a -10% price change increases revenue. So, 0 < % Revenue. % Revenue = EE PPxx,QQ DD. For this to hold, the parentheses must be negative. This is true only if the elasticity is greater then 1 in absolute value. I.e., if demand is elastic, a price cut increases revenue.

24 An elasticity-based pricing strategy Conversely when price is too low (below $60/unit), a +10% price change increases revenue. 0 < % Revenue. % Revenue = EE PPxx,QQ DD. Now the number in parentheses must be positive, which holds when elasticity is less than 1 in absolute value. If demand is inelastic, a price increase increases revenue.

25 Pricing a good to maximize revenue (concluded) To sum up: if demand for your product is elastic, you could raise revenue by decreasing price. If demand is inelastic, you could raise revenue by increasing price.

26 Technological progress when demand is inelastic Demand elasticity also determines how producers fare when technology shifts supply outward. If demand is elastic, the total revenue in that industry increases. Price goes down, but quantity goes way up. If demand is inelastic, revenue decreases with technological progress. Price goes down, and quantity only goes up a little.

27 Technological progress and revenues

28 Raising transaction costs when demand is inelastic Society wants some markets to produce less (none?) of their output. Drugs. Prostitution. Inputs that pollute, e.g., coal. On paper it could do this by decreasing supply. The War on Drugs is one strategy to decrease the supply of drugs. By adding additional costs of avoiding law enforcement to the costs of producing and selling drugs. The equilibrium moves up the demand curve: higher prices of drugs mean less quantity. But how elastic is the demand for drugs? How much less drugs do we have?

29 Research suggests: not very elastic When demand is inelastic and you increase the price, revenue goes up. Yes, the revenue of drug dealers. Probably not the objective of the policy. Makes the War exceedingly difficult to win. More money to: bribe enforcement agents, escalate real drug wars, and invent new drugs.

30 Raising transaction costs with a tax The silver lining in this disaster is that the additional revenue spent on drugs does not have to go to drug cartels. Recall that taxing a good also decreases its supply. Something that the states of Washington and Colorado recently remembered. At least with respect to marijuana laws. We will explore the economics of taxation more in a later lecture, but suffice it for now to say that the government could get most of the revenue gains that would otherwise go to sellers in the drugs market. The light green rectangle goes to the government instead of to sellers. Inelastic demand means we still wouldn t discourage much drug use with taxes, but at least we wouldn t be enriching the drug cartels.

31 Cap and trade environmental policies The right to discharge pollution can be viewed as an economic good. In the sense that some production relies on the emission of pollutants. Or at least is made cheaper by polluting. Producers would be willing to pay to emit pollutants if the alternative was shutting down or paying to process pollutants into a clean form. There is a demand curve for the right to pollute.

32 Cap and trade environmental policies (continued) Pollution is a problem if there is no supply curve, i.e., when no one owns the air and can function as seller. Consequently there is no price that firms pay, so they pollute too much. Cap and Trade policies correct this problem by making the right to pollute scarce (the cap ). Then polluters are allowed to trade pollution allowances, allocating them to their most valued uses. This happy outcome is discussed further in chapter 10.3 of the textbook, but I will not elaborate further here.

33 Cap and trade environmental policies (continued) Equilibrium (less pollution)

34 Cap and trade and elasticity This is all very cool, but how does it relate to elasticity? The supply of pollution allowances is perfectly inelastic. If demand increases, the price goes up but quantity does not. Environmentalists can reduce pollution by buying pollution permits and not using ( retiring ) them. This prices some polluters out of the market and reduces pollution even further. And wouldn t be possible without tradable pollution permits.

35 Retiring pollution allowances New equilibrium Remaining pollution Retired permits

36 Put a bounty on snakes, you get more snakes What happens when you do the same thing for a good that has elastic supply? Snake breeding apparently fits this criterion. And it is not very expensive either. We know this because when the governor of Delhi (in India) tried to combat the city s problem with cobras by offering a bounty for the snakes skins, enterprising citizens began farming cobras for the purpose of collecting the bounty.

37 The cobra effect : the bounty creates a market for cobras Equilibrium without bounty: snakes are not valuable enough to pay for Equilibrium with more snakes

38 Put a bounty on snakes, you get more snakes (concluded) Similar incarnations of the cobra effect have been observed in Vietnam (with rats), the U.S. (feral pigs and coyotes). In a non-animal realm, it underlies the failures of gun buy-back programs and the conjecture that public protesters burning of Beatles merchandise (in 1966) actually increased the sales of the band s records. Regarding the cobras, economists generally agree that the best solution would be to let this guy handle the problem.

39 Conclusion Price elasticity tells you how sensitive quantity demanded (or supplied) is to the good s price. Cross price elasticity measures tell you about relationships (substitutes/complements) between goods. Income elasticity measures tell you whether a good is normal or inferior. Elasticity matters a great deal for how firms price their products and for designing policies to increase or decrease the production of goods.

Ch. 7 outline. 5 principles that underlie consumer behavior

Ch. 7 outline. 5 principles that underlie consumer behavior Ch. 7 outline The Fundamentals of Consumer Choice The focus of this chapter is on how consumers allocate (distribute) their income. Prices of goods, relative to one another, have an important role in how

More information

Formula: Price of elasticity of demand= Percentage change in quantity demanded Percentage change in price

Formula: Price of elasticity of demand= Percentage change in quantity demanded Percentage change in price 1 MICRO ECONOMICS~ CHAPTER FOUR CHAPTER FOUR PRICE ELASTICITY OF DEMAND You know that when supply increases, the equilibrium price falls and the equilibrium quantity increases THE PRICE ELASTICITY OF DEMAND~

More information

CHAPTER 4, SECTION 1

CHAPTER 4, SECTION 1 DAILY LECTURE CHAPTER 4, SECTION 1 Understanding Demand What Is Demand? Demand is the willingness and ability of buyers to purchase different quantities of a good, at different prices, during a specific

More information

Elasticity and Its Applications

Elasticity and Its Applications Elasticity and Its Applications 1. In general, elasticity is a. a measure of the competitive nature of a market. b. the friction that develops between buyer and seller in a market. c. a measure of how

More information

Copyright 2010 Pearson Education Canada

Copyright 2010 Pearson Education Canada What are the effects of a high gas price on buying plans? You can see some of the biggest effects at car dealers lots, where SUVs remain unsold while sub-compacts sell in greater quantities. But how big

More information

Lesson-9. Elasticity of Supply and Demand

Lesson-9. Elasticity of Supply and Demand Lesson-9 Elasticity of Supply and Demand Price Elasticity Businesses know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good

More information

Study Guide Final Exam, Microeconomics

Study Guide Final Exam, Microeconomics Study Guide Final Exam, Microeconomics 1. If the price-consumption curve of a commodity slopes downward how can you tell whether the consumer spends more or less on this commodity from her budget (income)?

More information

The law of supply states that higher prices raise the quantity supplied. The price elasticity of supply measures how much the quantity supplied

The law of supply states that higher prices raise the quantity supplied. The price elasticity of supply measures how much the quantity supplied In a competitive market, the demand and supply curve represent the behaviour of buyers and sellers. The demand curve shows how buyers respond to price changes whereas the supply curve shows how sellers

More information

This is the midterm 1 solution guide for Fall 2012 Form A. 1) The answer to this question is A, corresponding to Form A.

This is the midterm 1 solution guide for Fall 2012 Form A. 1) The answer to this question is A, corresponding to Form A. This is the midterm 1 solution guide for Fall 2012 Form A. 1) The answer to this question is A, corresponding to Form A. 2) Since widgets are an inferior good (like ramen noodles) and income increases,

More information

2. Ben is exhausting his money income consuming products A and B in such quantities that MU a

2. Ben is exhausting his money income consuming products A and B in such quantities that MU a Chapter 5, Multiple choice: 1. Suppose you have a limited money income and you are purchasing products A and B whose prices happen to be the same. To maximize your utility you should purchase A and B in

More information

2007 Thomson South-Western

2007 Thomson South-Western Elasticity... allows us to analyze supply and demand with greater precision. is a measure of how much buyers and sellers respond to changes in market conditions THE ELASTICITY OF DEMAND The price elasticity

More information

!"#$#%&"'()#*(+,'&$-''(.#/-'((

!#$#%&'()#*(+,'&$-''(.#/-'(( Lecture 1 Basic Concerns of Economics What is Economics! Economics is the study of how society manages its scarce resources. o Economic Problem: How a society can satisfy unlimited wants with limited resources

More information

6) Consumer surplus is the red area in the following graph. It is 0.5*5*5=12.5. The answer is C.

6) Consumer surplus is the red area in the following graph. It is 0.5*5*5=12.5. The answer is C. These are solutions to Fall 2013 s Econ 1101 Midterm 1. No guarantees are made that this guide is error free, so please consult your TA or instructor if anything looks wrong. 1) If the price of sweeteners,

More information

Econ 1101 Summer 2013 Lecture 3. Section 005 6/19/2013

Econ 1101 Summer 2013 Lecture 3. Section 005 6/19/2013 Econ 1101 Summer 2013 Lecture 3 Section 005 6/19/2013 Announcements Homework 2 is due tonight at 11:45pm, CDT Recitation is tomorrow at the end of the class prepare questions about the homework or lecture

More information

To start we will look at the relationship between quantity demanded and price.

To start we will look at the relationship between quantity demanded and price. University of California, Merced ECO 1-Introduction to Economics Chapter 5 Lecture otes Professor Jason Lee I. Elasticity As we learned in Chapter 4, there is a clear relationship between the quantity

More information

Econ 1101 Spring 2013 Week 3. Section 038 2/6/2013

Econ 1101 Spring 2013 Week 3. Section 038 2/6/2013 Econ 1101 Spring 2013 Week 3 Section 038 2/6/2013 Announcements Homework 2 due Friday night at 11:45pm, CST 2 Agenda for today 1. The concept of elasticity 2. Related case study 3. Income elasticity of

More information

Demand and Supply. Economics

Demand and Supply. Economics Demand and Supply Economics How Do Demand and Price Interact? Demand = What we are willing and able to buy at various prices. Demand is expressed in terms of a time frame: eg. per day or per week. Quantity

More information

Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (4) Price Elasticity of Demand

Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (4) Price Elasticity of Demand Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (4) Price Elasticity of Demand The law of demand tells us that consumers will buy more of a product when its price declines and

More information

EconS Monopoly - Part 1

EconS Monopoly - Part 1 EconS 305 - Monopoly - Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 23, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 23 October 23, 2015 1 / 50 Introduction For the rest

More information

ECON (ENT) COURSE LESSON THREE. Supply and Demand. CHAPTER 7 Supply and Demand. Lesson Three Supply and Demand 93

ECON (ENT) COURSE LESSON THREE. Supply and Demand. CHAPTER 7 Supply and Demand. Lesson Three Supply and Demand 93 ECON (ENT) COURSE LESSON THREE Supply and Demand CHAPTER 7 Supply and Demand Lesson Three Supply and Demand 93 EXERCISES Matching (28 points) From the list below, select the term that matches each of the

More information

Econ Microeconomics Notes

Econ Microeconomics Notes Econ 120 - Microeconomics Notes Daniel Bramucci December 1, 2016 1 Section 1 - Thinking like an economist 1.1 Definitions Cost-Benefit Principle An action should be taken only when its benefit exceeds

More information

Intermediate Microeconomics DEMAND BEN VAN KAMMEN, PHD PURDUE UNIVERSITY

Intermediate Microeconomics DEMAND BEN VAN KAMMEN, PHD PURDUE UNIVERSITY Intermediate Microeconomics DEMAND BEN VAN KAMMEN, PHD PURDUE UNIVERSITY Demand Demand Function: A representation of how quantity demanded depends on prices, income, and preferences. Our objective in this

More information

Business Analysis for Engineers Prof. S. Vaidhyasubramaniam Adjunct Professor, School of Law SASTRA University-Thanjavur

Business Analysis for Engineers Prof. S. Vaidhyasubramaniam Adjunct Professor, School of Law SASTRA University-Thanjavur Business Analysis for Engineers Prof. S. Vaidhyasubramaniam Adjunct Professor, School of Law SASTRA University-Thanjavur Lecture -39 Price & Income Elasticity and Utility In the previous class, we were

More information

Principles of MicroEconomics: Econ102

Principles of MicroEconomics: Econ102 Principles of MicroEconomics: Econ102 Price Elasticity of Demand: The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of

More information

AP Microeconomics Chapter 6 Outline

AP Microeconomics Chapter 6 Outline I. Introduction AP Microeconomics Chapter 6 A. Learning Objectives In this chapter students should learn: 1. What price elasticity of demand is and how it can be applied. 2. The usefulness of the total

More information

Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 2

Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 2 Economics 2 Spring 2016 rofessor Christina Romer rofessor David Romer SUGGESTED ANSWERS TO ROBLEM SET 2 1.a. Recall that the price elasticity of supply is the percentage change in quantity supplied divided

More information

Economic Analysis for Business Decisions Multiple Choice Questions Unit-2: Demand Analysis

Economic Analysis for Business Decisions Multiple Choice Questions Unit-2: Demand Analysis Economic Analysis for Business Decisions Multiple Choice Questions Unit-2: Demand Analysis 1. The law of demand states that an increase in the price of a good: a. Increases the supply of that good. b.

More information

CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER OUTLINE Perfect competition Demand at the market and firm levels Short-run output decisions Long-run decisions

More information

MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS. Townley, Chapter 4

MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS. Townley, Chapter 4 MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS Townley, Chapter 4 Review of Basic Microeconomics Slides cover the following topics from textbook: Input markets. Decision making on the margin. Pricing

More information

2013 Pearson. What do you do when the price of gasoline rises?

2013 Pearson. What do you do when the price of gasoline rises? What do you do when the price of gasoline rises? Elasticities of Demand and Supply 5 When you have completed your study of this chapter, you will be able to 1 Define the price elasticity of demand, and

More information

This is what we call a demand schedule. It is a table that shows how much consumers are willing and able to purchase at various prices.

This is what we call a demand schedule. It is a table that shows how much consumers are willing and able to purchase at various prices. Demand Market: an institution or mechanism, which brings together buyers ("demanders") and sellers ("suppliers") of particular goods and services. The remainder of this unit assumes a perfectly competitive

More information

Chapter 6 Elasticity: The Responsiveness of Demand and Supply

Chapter 6 Elasticity: The Responsiveness of Demand and Supply hapter 6 Elasticity: The Responsiveness of emand and Supply 1 Price elasticity of demand measures: how responsive to price changes suppliers are. how responsive sales are to changes in the price of a related

More information

P S1 S2 D2 Q D1 P S1 S2 D2 Q D1

P S1 S2 D2 Q D1 P S1 S2 D2 Q D1 This is the solution guide compiled by your instructors of Econ 1101. This is a guide for form A. If you had form B, you can still figure from this guide what the answers to your questions are. If you

More information

Interpreting Price Elasticity of Demand

Interpreting Price Elasticity of Demand INTRO Go to page: Go to chapter Bookmarks Printed Page 466 Interpreting Price 9 Behind the 48.2 The Price of Supply 48.3 An Menagerie Producer 49.1 Consumer and the 49.2 Producer and the 50.1 Consumer,

More information

Chapter 6 Elasticity: The Responsiveness of Demand and Supply

Chapter 6 Elasticity: The Responsiveness of Demand and Supply Economics 6 th edition 1 Chapter 6 Elasticity: The Responsiveness of Demand and Supply Modified by Yulin Hou For Principles of Microeconomics Florida International University Fall 2017 The Price Elasticity

More information

Chapter 6. Elasticity

Chapter 6. Elasticity Chapter 6 Elasticity Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in this chapter. The text discusses the major determinants of price

More information

Chapter 4 Review: Demand. CHAPTER 4 Graphic Organizer

Chapter 4 Review: Demand. CHAPTER 4 Graphic Organizer Chapter 4 Review: Demand CHAPTER 4 Graphic Organizer CHAPTER 4, SECTION 1 Key Concepts What Is Demand? A market is a place where people buy and sell things. A market has two sides. There is a buying side

More information

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity CHAPTER 4 Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity CHAPTER OVERVIEW Price elasticity is one of the most useful concepts in economics. It measures the responsiveness

More information

ECONOMICS 103. Topic 3: Supply, Demand & Equilibrium

ECONOMICS 103. Topic 3: Supply, Demand & Equilibrium ECONOMICS 103 Topic 3: Supply, Demand & Equilibrium Assumptions of the competitive market model: all agents are price takers, homogeneous products. Demand & supply: determinants of demand & supply, demand

More information

CHAPTER 4: DEMAND. Lesson 3: elasticity of demand

CHAPTER 4: DEMAND. Lesson 3: elasticity of demand CHAPTER 4: DEMAND Lesson 3: elasticity of demand 3 CASES OF DEMAND ELASTICITY Because quantity demanded depends on its price, economists use a concept called elasticity. Elasticity is a measure of responsiveness

More information

Lecture - 03 Elasticity of Demand

Lecture - 03 Elasticity of Demand Economics, Management and Entrepreneurship Prof. Pratap K. J. Mohapatra Department of Industrial Engineering & Management Indian Institute of Technology - Kharagpur Lecture - 03 Elasticity of Demand Good

More information

Econ : Principles of Microeconomics Midterm practice problems

Econ : Principles of Microeconomics Midterm practice problems Econ 1101-005: Principles of Microeconomics Midterm practice problems The following four questions consider the market for widgets. For each of the following situations, determine what happens to the equilibrium

More information

Supply and Demand. Objective 8.04

Supply and Demand. Objective 8.04 Supply and Demand Objective 8.04 Supply and Demand Pages 258-259 259 copy bold terms and give a definition or description of each. Page 261 Copy the questions Worksheet A-2A 1. Surplus When the amount

More information

ELASTICITY AND ITS APPLICATION. J. Mao

ELASTICITY AND ITS APPLICATION. J. Mao ELASTICITY AND ITS APPLICATION J. Mao Elasticity Until now, we ve been talking about the direction in which quantities change. A downward-sloping demand: price é è quantity demanded ê In real life it is

More information

Chapter 3 Quantitative Demand Analysis

Chapter 3 Quantitative Demand Analysis Chapter 3 Quantitative Demand Analysis EX1: Suppose a 10 percent price decrease causes consumers to increase their purchases by 30%. What s the price elasticity? EX2: Suppose the 10 percent decrease in

More information

Econ 200 Lecture 7 January 24, 2017

Econ 200 Lecture 7 January 24, 2017 1. Learning Catalytics Session 2. Elasticity and Total Revenue Econ 200 Lecture 7 January 24, 2017 3. Cross-Price and Income Elasticities 4. Elasticity of Supply 5. Consumer & Producer Surplus 1 Total

More information

Week One What is economics? Chapter 1

Week One What is economics? Chapter 1 Week One What is economics? Chapter 1 Economics: is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives

More information

Elasticity and Its Applications. Copyright 2004 South-Western

Elasticity and Its Applications. Copyright 2004 South-Western Elasticity and Its Applications 5 Copyright 2004 South-Western Copyright 2004 South-Western/Thomson Learning Elasticity... allows us to analyze supply and demand with greater precision. is a measure of

More information

Some of the assumptions of perfect competition include:

Some of the assumptions of perfect competition include: This session focuses on how managers determine the optimal price, quantity and advertising decisions under perfect competition. In earlier sessions we have looked at the nature of competitive markets.

More information

ECO 2301 Spring EXAM 2 Form 2 Wednesday, April 1 st Solutions

ECO 2301 Spring EXAM 2 Form 2 Wednesday, April 1 st Solutions ECO 2301 Spring 2015 Sec 002 Klaus Becker EXAM 2 Form 2 Wednesday, April 1 st Solutions 1. Mathematically, price elasticity of demand is: A. the percentage change in the quantity of a good that is demanded

More information

Economics for Business. Lecture 1- The Market Forces of Supply and Demand

Economics for Business. Lecture 1- The Market Forces of Supply and Demand Economics for Business Lecture 1- The Market Forces of Supply and Demand The theory of supply and demand (S&D): Considers how buyers and sellers behave and interact with one another in competitive markets

More information

Econ 101, sections 2 and 6, S06 Schroeter Exam #2, Red. Choose the single best answer for each question.

Econ 101, sections 2 and 6, S06 Schroeter Exam #2, Red. Choose the single best answer for each question. Econ 101, sections 2 and 6, S06 Schroeter Exam #2, Red Choose the single best answer for each question. 1. If the own-price elasticity of demand for a good is -2.0, this implies that consumers would a.

More information

ECON 251. Exam 1 Pink. Fall 2013

ECON 251. Exam 1 Pink. Fall 2013 ECON 251 1. By definition, opportunity cost is a. The value of the best alternative b. The sum of the value of all available alternatives c. The amount of money it takes to buy an item d. Always greater

More information

Question # 1 of 15 ( Start time: 01:24:42 PM ) Total Marks: 1 A person with a diminishing marginal utility of income: Will be risk averse. Will be risk neutral. Will be risk loving. Cannot decide without

More information

Theory of Consumer Behavior First, we need to define the agents' goals and limitations (if any) in their ability to achieve those goals.

Theory of Consumer Behavior First, we need to define the agents' goals and limitations (if any) in their ability to achieve those goals. Theory of Consumer Behavior First, we need to define the agents' goals and limitations (if any) in their ability to achieve those goals. We will deal with a particular set of assumptions, but we can modify

More information

Intermediate Microeconomics IMPERFECT COMPETITION BEN VAN KAMMEN, PHD PURDUE UNIVERSITY

Intermediate Microeconomics IMPERFECT COMPETITION BEN VAN KAMMEN, PHD PURDUE UNIVERSITY Intermediate Microeconomics IMPERFECT COMPETITION BEN VAN KAMMEN, PHD PURDUE UNIVERSITY No, not the BCS Oligopoly: A market with few firms but more than one. Duopoly: A market with two firms. Cartel: Several

More information

Chapter 1- Introduction

Chapter 1- Introduction Chapter 1- Introduction A SIMPLE ECONOMY Central PROBLEMS OF AN ECONOMY: scarcity of resources problem of choice Every society has to decide on how to use its scarce resources. Production, exchange and

More information

Preview from Notesale.co.uk Page 6 of 89

Preview from Notesale.co.uk Page 6 of 89 Guns Butter 200 0 175 75 130 125 70 150 0 160 What it shows: the maximum combinations of two goods an economy can produce with its existing resources and technology; an economy can produce at points on

More information

Also, big thank you to fellow TA Enoch Hill for edits and some additions to the guide.

Also, big thank you to fellow TA Enoch Hill for edits and some additions to the guide. Hello class, once again, here s an unofficial guide to the sample midterm. Please use this with caution, since 1) I am prone to error so incorrect explanations are entirely possible and 2) you should do

More information

Supply and Demand. Worksheet A-2A 2014

Supply and Demand. Worksheet A-2A 2014 Supply and Demand Worksheet A-2A 2014 Worksheet A-2A 1. Surplus When the amount supplied exceeds the demand 2. Shortage When the amount demanded exceeds the supply 3. Utility The power to satisfy your

More information

ECON MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter Introduction Towson University 1 / 69

ECON MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter Introduction Towson University 1 / 69 ECON 202 - MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University J.Jung Chapter 2-4 - Introduction Towson University 1 / 69 Disclaimer These lecture notes are customized for the Macroeconomics

More information

Chapter 4. Elasticity. In this chapter you will learn to. Price Elasticity of Demand

Chapter 4. Elasticity. In this chapter you will learn to. Price Elasticity of Demand Chapter 4 Elasticity In this chapter you will learn to 1. Explain the meaning of price elasticity of demand and how it is measured. 2. Describe the relationship between demand elasticity and total expenditure.

More information

1 Applying the Competitive Model. 2 Consumer welfare. These notes essentially correspond to chapter 9 of the text.

1 Applying the Competitive Model. 2 Consumer welfare. These notes essentially correspond to chapter 9 of the text. These notes essentially correspond to chapter 9 of the text. 1 Applying the Competitive Model The focus of this chapter is welfare economics. Note that "welfare" has a much di erent meaning in economics

More information

ECO401 Current Online 85 Quizzes Question Repeated ignore In Green color are doubted one

ECO401 Current Online 85 Quizzes Question Repeated ignore In Green color are doubted one ECO401 Current Online 85 Quizzes Question Repeated ignore In Green color are doubted one Question # 1 of 15 ( Start time: 01:24:42 PM ) Total Marks: 1 A person with a diminishing marginal utility of income:

More information

Econ: CH 7 Test Review Demand & Supply

Econ: CH 7 Test Review Demand & Supply Econ: CH 7 Test Review Demand & Supply The Big Idea: 1. Scarcity is the basic economic problem that requires people to make choices about how to use limited resources 2. Buyers and sellers voluntarily

More information

Microeconomics: Principles, Applications, and Tools

Microeconomics: Principles, Applications, and Tools Microeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 5 Elasticity: A Measure of Responsiveness Learning Objectives 5.1 List the determinants of the price elasticity of demand 5.2 Use

More information

Chapter 6 Lecture - Elasticity: The Responsiveness of Demand and Supply

Chapter 6 Lecture - Elasticity: The Responsiveness of Demand and Supply Chapter 6 Lecture - Elasticity: The Responsiveness of Demand and Supply 1 The Price Elasticity of Demand and Its Measurement We define price elasticity of demand and understand how to measure it. Although

More information

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture -29 Monopoly (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture -29 Monopoly (Contd ) Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture -29 Monopoly (Contd ) In today s session, we will continue our discussion on monopoly.

More information

Dr. Mahmoud A. Arafa Elasticity. Income positive negative. Cross positive negative

Dr. Mahmoud A. Arafa  Elasticity. Income positive negative. Cross positive negative Introduction: When the price of a goods falls, its quantity demanded rises and when the price of the goods rises, its quantity demanded falls. This is generally known as law of demand. This law of demand

More information

ECON MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter Micro Basics Towson University 1 / 51

ECON MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter Micro Basics Towson University 1 / 51 ECON 202 - MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University J.Jung Chapter 2-4 - Micro Basics Towson University 1 / 51 Disclaimer These lecture notes are customized for the Macroeconomics

More information

Figure 4 1 Price Quantity Quantity Per Pair Demanded Supplied $ $ $ $ $10 2 8

Figure 4 1 Price Quantity Quantity Per Pair Demanded Supplied $ $ $ $ $10 2 8 Econ 101 Summer 2005 In class Assignment 2 Please select the correct answer from the ones given Figure 4 1 Price Quantity Quantity Per Pair Demanded Supplied $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8

More information

Chapter 19 Demand and Supply Elasticity

Chapter 19 Demand and Supply Elasticity Chapter 19 Demand and Supply Elasticity Learning Objectives After you have studied this chapter, you should be able to 1. define price elasticity of demand, elastic demand, unit elastic demand, inelastic

More information

ECON 1001 A. Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work.

ECON 1001 A. Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work. It is most beneficial to you to write this mock midterm UNDER EXAM CONDITIONS. This means: Complete the midterm in 1.5 hour(s). Work on your own. Keep your notes and textbook closed. Attempt every question.

More information

ASSESSMENT TOPICS. TOPIC 1: Market & Resource Allocation PEC 4123: ECONOMIC ENVIRONMENT FOR BUSINESS 10/13/2016

ASSESSMENT TOPICS. TOPIC 1: Market & Resource Allocation PEC 4123: ECONOMIC ENVIRONMENT FOR BUSINESS 10/13/2016 ASSESSMENT PEC 4123: ECONOMIC ENVIRONMENT FOR BUSINESS Course Work: 60% - Time Constrained Assessment 20% - Case Analysis & Presentation 30% - Participation 10% Examination: 40% TOTAL: 100% TOPICS 1. Markets

More information

Downloaded for free from 1

Downloaded for free from  1 Micro Chapter 6 -price ceiling or price cap: government regulation that makes it illegal to charge a price higher then a specified level -effects of the price cap on the market depend on whether the ceiling

More information

Economics 323 Microeconomic Theory Fall 2016

Economics 323 Microeconomic Theory Fall 2016 pink=a FIRST EXAM Chapter Two Economics 33 Microeconomic Theory Fall 06. The process whereby price directs existing supplies of a product to the users who value it the most is called the function of price.

More information

Economics 323 Microeconomic Theory Fall 2016

Economics 323 Microeconomic Theory Fall 2016 peach=b FIRST EXAM Chapter Two Economics 33 Microeconomic Theory Fall 06. The process whereby price directs existing supplies of a product to the users who value it the most is called the function of price.

More information

ASSIGNMENT MEMORANDUM

ASSIGNMENT MEMORANDUM Page 1 of 5 ASSIGNMENT MEMORANDUM SUBJECT : MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) ASSIGNMENT : 2 ND SEMESTER 2011 SPECIFIC INSTRUCTIONS Answer ALL the questions. Textbook references are to Mohr, P.,

More information

Lecture 6 Consumer Choice

Lecture 6 Consumer Choice Lecture 6 Consumer Choice Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Rational Choice Consumption Decisions Market Demand 2 Consumers Responsiveness Price Applications Income Substitutes

More information

FAQ: Decision-Making Strategies

FAQ: Decision-Making Strategies Q&A: Decision-Making Strategies Question 1: What is supply and demand? Answer 1: Supply refers to the actions of firms to create, distribute, and market goods and services. Firms create products that they

More information

ECON 110, Professor Hogendorn. Problem Set 3

ECON 110, Professor Hogendorn. Problem Set 3 ECON 110, Professor Hogendorn Problem Set 3 Note: problem 4 UAW mentions a subsidy, which is just the opposite of a sales tax. To see how it works, look at review problem Veerman. 1. Juvenor. You take

More information

First Term Weekly Test ECONOMICS. ECONOMICS STD 10 (ICSE) Ch. 3. ELASTICITY OF DEMAND

First Term Weekly Test ECONOMICS. ECONOMICS STD 10 (ICSE) Ch. 3. ELASTICITY OF DEMAND First Term Weekly Test ECONOMICS ECONOMICS STD 10 (ICSE) Ch. 3. ELASTICITY OF DEMAND 1. What is the meaning of Elasticity of Demand? Ans. The term elasticity indicates responsiveness of one variable to

More information

Homework 2 Answer Key

Homework 2 Answer Key Econ 226 Principles of Microeconomics Fall, 24 Dr. Kathryn Wilson Due Date: Tuesday, September 28 th Homework 2 Answer Key 1. When the of movie admissions increases from $7 to $8, the demanded falls from

More information

1) Your answer to this question is what form of the exam you had. The answer is A if you have form A. The answer is B if you have form B etc.

1) Your answer to this question is what form of the exam you had. The answer is A if you have form A. The answer is B if you have form B etc. This is the guide to Fall 2014, Midterm 1, Form A. If you have another form, the answers will be different, but the solution will be the same. Please consult your TA or instructor if you think there is

More information

Midterm 2 - Solutions

Midterm 2 - Solutions Ecn 100 - Intermediate Microeconomic Theory University of California - Davis November 13, 2009 Instructor: John Parman Midterm 2 - Solutions You have until 11:50am to complete this exam. Be certain to

More information

2 Theory of Demand, Slutsky Equation

2 Theory of Demand, Slutsky Equation Microeconomics I - Lecture #2, September 29, 2008 2 Theory of Demand, Slutsky Equation 2.1 Theory of Demand Based on the analysis of consumer s optimal consumption we know that the demand depends on individual

More information

Chapter 4: Understanding Demand

Chapter 4: Understanding Demand SCHS SOCIAL STUDIES What you need to know UNIT TWO 1. What a competitive market is and how it is described by the supply and demand model 2. What a supply curve shows 3. The difference between a movement

More information

A.P. Microeconomics. In Class Review #2

A.P. Microeconomics. In Class Review #2 A.P. Microeconomics In Class Review #2 Pricing 1. Pricing system serves as a rationing device The market decides who gets g&s by which households are willing to pay the price for it!! Pricing a. Even when

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2 Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose

More information

INTI COLLEGE MALAYSIA UNIVERSITY FOUNDATION PROGRAMME ECO 185 : BASIC ECONOMICS 1 RESIT EXAMINATION : APRIL 2003 SESSION

INTI COLLEGE MALAYSIA UNIVERSITY FOUNDATION PROGRAMME ECO 185 : BASIC ECONOMICS 1 RESIT EXAMINATION : APRIL 2003 SESSION ECO 185 (R) / Page 1 of 10 INTI COLLEGE MALAYSIA UNIVERSITY FOUNDATION PROGRAMME ECO 185 : BASIC ECONOMICS 1 RESIT EXAMINATION : APRIL 2003 SESSION Answer ALL questions in SECTION A in the OMR sheet provided

More information

Chapter 4: Individual and Market Demand. Chapter : Implications of optimal choice

Chapter 4: Individual and Market Demand. Chapter : Implications of optimal choice Econ 203 Chapter 4 page 1 Overview: Chapter 4: Individual and Market Demand Chapter 4 + 5.1-5.3: Implications of optimal choice What happens if changes? What happens to individual demand if a price changes?

More information

a. Graph the demand curve in figure 1. Page 1 Practice Homework Elasticity Economics 101 The Economic Way of Thinking

a. Graph the demand curve in figure 1. Page 1 Practice Homework Elasticity Economics 101 The Economic Way of Thinking Price Practice Homework ity Economics 101 The Economic Way of Thinking 1. The table below shows demand data for fountain soft drinks. Columns 4 and 5 show the average percent change in price and quantity

More information

Econ 98 (CHIU) Midterm 1 Review: Part A Fall 2004

Econ 98 (CHIU) Midterm 1 Review: Part A Fall 2004 Disclaimer: The review may help you prepare for the exam. The review is not comprehensive and the selected topics may not be representative of the exam. In fact, we do not know what will be on the exam.

More information

Chapter 3 Elasticity.notebook. February 03, Chapter 3: Competitive Dynamics and Government (Elasticity and Related Concepts)

Chapter 3 Elasticity.notebook. February 03, Chapter 3: Competitive Dynamics and Government (Elasticity and Related Concepts) Chapter 3: Competitive Dynamics and Government (Elasticity and Related Concepts) price elasticity of demand the responsiveness of a product's quantity demanded to a change in its price. Degree of Elasticity

More information

Elasticity and Its Application

Elasticity and Its Application Elasticity and Its Application Elasticity... is a measure of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision. Journal Question-Name

More information

Week 1 (Part 1) Introduction Econ 101

Week 1 (Part 1) Introduction Econ 101 Week 1 (art 1) Introduction Econ 101 reliminary Concepts (Chapter 2 g 38-41 & 47-50) Economics is the study of how individuals and societies choose to use scarce resources that nature and previous generations

More information

Econ 101, Final, Fall ANSWER KEY

Econ 101, Final, Fall ANSWER KEY Econ 101, Final, Fall 2008. ANSWER KEY Prof. Guse, W & L University 1. [ 3 Points ] The bowed-out shape of the Production Possibility Frontier (PPF): (a) reflects the existence of opportunity cost. (b)

More information

The price elasticity of demand when price decreases from $9 to $7 is A B C D -1.

The price elasticity of demand when price decreases from $9 to $7 is A B C D -1. Varsity Economics Product Market: Elasticity 1 The price elasticity of demand is a measure of the A effect of changes in demand on the price. B relationship between price and profitability. C responsiveness

More information

1. Demand: willingness to buy a good or service and the ability to pay for it; how much of an item an individual is willing to purchase at each price

1. Demand: willingness to buy a good or service and the ability to pay for it; how much of an item an individual is willing to purchase at each price 1. Demand: willingness to buy a good or service and the ability to pay for it; how much of an item an individual is willing to purchase at each price 2. The two things needed for demand to exist are: willingness

More information

Lecture 11: Market Power and Monopoly

Lecture 11: Market Power and Monopoly Lecture 11: Market Power and Monopoly November 14, 2017 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With Market

More information