Università degli Studi di Torino Dipartimento di Giurisprudenza Corso di Laurea Magistrale (a ciclo unico) in Giurisprudenza Anno accademico 2017/2018

Size: px
Start display at page:

Download "Università degli Studi di Torino Dipartimento di Giurisprudenza Corso di Laurea Magistrale (a ciclo unico) in Giurisprudenza Anno accademico 2017/2018"

Transcription

1 Università degli Studi di Torino Dipartimento di Giurisprudenza Corso di Laurea Magistrale (a ciclo unico) in Giurisprudenza Anno accademico 2017/2018 Economia Politica Docente: Alessandro Stanchi

2 The course: some preliminary details Lectures sequence: 1 academic hour = 45 real life minutes (=0,75 rl hours). Therefore, 2.5 a-h = 3 rl-h, and so on ; topics; in-class exercises; questions, in the last 20 minutes of every lecture. Attendance: discrectionary. Exam: exercise(s), and potentially multiple-choice questions. registration rules. alessandro.stanchi@unito.it Office hours: right after lectures.

3 Il corso: notizie pratiche Orari: sul sito Modalità delle lezioni Frequenza non obbligatoria Libri di testo: sul sito Esame: scritto Contatti: Ricevimento: dopo lezione, oppure su appuntamento 3

4 Suggested readings: textbooks Mankiw N. Gregory, Taylor Mark P., Principi di economia, Zanichelli, Bologna, ultima edizione. Di utile consultazione: Lieberman Marc, Hall Robert, Principi di Economia, Apogeo Education, Milano, ultima edizione. Lipsey Richard, Chrystal Alec, Economia, Zanichelli, Bologna, ultima edizione. Mankiw N. Gregory, L'essenziale di Economia, Bologna, Zanichelli, ultima edizione. Samuelson Paul A., Nordhaus William D., Bollino Carlo A., Economia, McGraw-Hill Education, ultima edizione. Taylor John B., Economia, ultima edizione, Zanichelli, Bologna.

5 3. Elasticity: A Measure of Responsiveness Reference: Textbook by Arthur O'Sullivan, Ch. 4 (IT) or 20 (UK) T. by Mankiew, Ch. 4 (IT) 5

6 What is the definition of elasticity? WHAT WE TALK ABOUT What is the meaning and importance of: price elasticity of demand? income elasticity of demand? price elasticity of supply? What factors influence the size of these various elasticities? How the cross-price elasticity of demand measures the responsiveness of demand for one good to changes in the price of another good 6

7 Price Elasticity of Demand in action 7

8 Market supply-demand shifts and results S 2 S1 Price P 2 P 3 c b a The effect on price of a shift in supply depends on the responsiveness of demand to a change in price. P 1 D' D O Q 3 Q 2 Q 1 Quantity 8

9 Defining and Measuring Elasticity The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign). A measure of the responsiveness of the quantity demanded to changes in price; equal to the absolute value of the percentage change in quantity demanded divided by the percentage change in price. 9

10 The Price Elasticity of Demand 10

11 L elasticità della domanda al prezzo E il rapporto tra due variazioni %. L elasticità della domanda rispetto al prezzo è data dal rapporto tra la variazione % della quantità domandata e la variazione % del prezzo: ε q, p q q % q = = p p % p o anche ε q, p q p p = = f '( p ) p q q Esempio con funzione di domanda lineare: ε q, p p p bp = f ' ( p ) = ( b ) = q q a bp xi = f ( p i ) * cioè con i = 1,2

12 12

13 13

14 The price elasticity of demand Price Elasticity and the Demand Curve Elastic demand The price elasticity of demand is greater than one, so the percentage change in quantity exceeds the percentage change in price.

15 Elastic Demand Elastic Demand: Price Elasticity of Demand = 2 Price of bridge crossing A 20% increase in the price... $ B A D ,200 generates a 40% decrease in the quantity of crossings demanded. Quantity of bridge crossings (per day)

16 The price elasticity of demand Price Elasticity and the Demand Curve Inelastic demand The price elasticity of demand is less than one, so the percentage change in quantity is less than the percentage change in price.

17 Price of bridge crossing Inelastic Demand Inelastic Demand: Price Elasticity of Demand = 0.5 A 20% increase in the price... $ B A ,050 D 2... generates a 10% decrease in the quantity of crossings demanded. Quantity of bridge crossings (per day)

18 The price elasticity of demand Price Elasticity and the Demand Curve Unit elastic demand The price elasticity of demand is one, so the percentage change in quantity equals the percentage change in price.

19 Unit Elasticity of Demand Unit-Elastic Demand: Price Elasticity of Demand = 1 Price of bridge crossing A 20% increase in the price... $ B A D , generates a 20% decrease in the quantity of crossings demanded. Quantity of bridge crossings (per day) 19

20 The price elasticity of demand Price Elasticity and the Demand Curve Perfectly inelastic demand The price elasticity of demand is zero.

21 Two Extreme Cases of Price Elasticity of Demand Price of shoelaces (per pair) Perfectly Inelastic Demand: Price Elasticity of Demand = 0 D 1 An increase in price $3 $2 leaves the quantity demanded unchanged. 0 1 Quantity of shoelaces (billions of pairs per year) 21

22 The price elasticity of demand Price Elasticity and the Demand Curve Perfectly elastic demand The price elasticity of demand is infinite.

23 Two Extreme Cases of Price Elasticity of Demand Price Elastic Demand: Price Elasticity of Demand = Price of pink tennis balls (per dozen) At any price above $5, quantity demanded is zero At exactly $5, consumers will buy any quantity $5 D 2 At any price below $5, quantity demanded is infinite 0 Quantity of tennis balls (dozens per year) 23

24 24

25 Using the Midpoint (arc) Method The midpoint method is a technique for calculating the percent change. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values. 25

26 Using the Midpoint Method 26

27 P ( ) Measuring elasticity using the arc method P = 2 Mid P m Q = 10 n Pε d = = Q P mid Q mid P = 10/15 x 7/2 = 70/30 = 7/3 = Demand 0 15 Mid Q

28 Using the Midpoint Method 28

29 Using the Midpoint Method 29

30 If the price of good X rises from 9 to 11 and, as a result, quantity demanded falls from 100 units to 60 units, what is the price elasticity of demand between these prices? A. 2/ 80 = % 20% 20% 20% 20% B. 80/2 = 40 C. 0.2/ 0.5 = 0.4 D. 0.5/0.2 = 2.5 E. 1 A. B. C. D. 30 E.

31 Price Elasticity of Demand Some determinants of price elasticity of demand number and closeness of substitute goods proportion of income spent on the good the time period TABLE 20.3 Determinates of Elasticity Factor Availability of substitutes Passage of time Fraction of consumer budget Necessity Demand is relatively elastic if There are many substitutes. a long time passes. is large. the product is a luxury. Demand is relatively inelastic if There are few substitutes. a short time passes. is small. the product is a necessity. 31

32 APPLICATION A A CLOSER LOOK AT THE ELASTICITY OF DEMAND FOR GASOLINE APPLYING THE CONCEPTS: How does the elasticity of demand vary over time? We ve seen that the demand for gasoline is more elastic in the long run, when consumers have more opportunity to respond to changes in price. A 2004 study explores two sorts of response to higher gasoline prices. First, when the price increases, people drive fewer miles, so there are fewer cars on the road. A second response to higher prices is to switch to more fuel-efficient cars. TABLE 20.4 Gasoline Prices, Traffic Volume, and Fuel Efficiency Elasticity of Traffic Volume Fuel Efficiency Short Run (1 year) Long Run (5 years) Source: Based on Phil Goodwin, Joyce Dargay, and Mark Hanly, Elasticities of Road Traffic and Fuel Consumption with Respect to Price and Income: A Review, Transport Review 24, no.3 (2004):

33 33

34 The price elasticity of demand for holidays in Greece is likely to be high because: A. people tend to book up a long time in advance. B. there are plenty of different holidays abroad to choose from. 20% 20% 20% 20% 20% C. expenditure on holidays account for a relatively small part of people s total income. D. holidays at home provide no real alternative. E. people need a holiday if they are to cope with the year ahead and they prefer holidays abroad. A. B. C. D. E. 34

35 Price Elasticity of Demand Elasticity and the Availability of Substitutes TABLE 5.2 Price Elasticities of Demand for Selected Products1 Inelastic Unit elastic Elastic Product Salt Food (wealthy countries) Weekend canoe trips Water Coffee Physician visits Sport fishing Gasoline (short run) Eggs Cigarettes Food (poor countries) Shoes and footwear Gasoline (long run) Housing Fruit Juice Automobiles Foreign travel Motorboats Restaurant meals Air travel Movies Specific brands of coffee Price Elasticity of Demand

36 36 Elasticity and Revenues: hints for the revenue-maximizer rational agent

37 Using price elasticity of demand: the behavior of total revenue Price Elasticity and Total Revenue Total revenue The money a firm generates from selling its product. Total revenue = price per unit quantity sold What happens to Total Revenue if price goes up? Good News: You get more for each unit sold Bad News: You sell fewer units Effect on TR depends on which effect is bigger, i.e. whether the price elasticity is less than or greater than one.

38 4 Total expenditure (=revenue) 3 P( ) 2 1 Consumers total expenditure = firms total revenue = 2 x 3m = 6m D Q (millions of units per period of time) 38

39 Elastic demand between two points Expenditure falls as price rises P( ) 5 4 b a D Q (millions of units per period of time) 39

40 Elastic demand between two points Expenditure rises as price falls P( ) 5 4 b a D Q (millions of units per period of time) 40

41 Inelastic demand between two points 8 c Expenditure rises as price rises P( ) 4 a D Q (millions of units per period of time) 41

42 Inelastic demand between two points 8 c Expenditure falls as price falls P( ) 4 a D Q (millions of units per period of time) 42

43 P Totally inelastic demand (Elasticity = 0) D P 2 b P 1 a O Q 1 Q 43

44 P Infinitely elastic demand (Elasticity = ) P 1 a b D O Q 1 Q 2 Q 44

45 P Unit elastic demand (Elasticity = 1) Expenditure stays the same as price changes 20 a 8 b D O Q

46 Elasticity and Total Revenue When a seller raises the price of a good, there are two countervailing effects in action (except in the rare case of a good with perfectly elastic or perfectly inelastic demand): A price effect: After a price increase, each unit sold sells at a higher price, which tends to raise revenue. A quantity effect: After a price increase, fewer units are sold, which tends to lower revenue. 46

47 Elasticity and Total Revenue If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect. If demand for a good is inelastic (the price elasticity of demand is less than 1), a higher price increases total revenue. In this case, the price effect is stronger than the quantity effect. 47

48 Elasticity and Total Revenue If demand for a good is unit-elastic (the price elasticity of demand is exactly 1), an increase in price does not change total revenue. In this case, the sales effect and the price effect exactly offset each other. 48

49 Using price elasticity of demand: the behavior of total revenue TABLE 5.5 Price and Total Revenue with Different Elasticities of Demand Elastic Demand: E d = 2.0 Price Quantity Sold Total Revenue $ Inelastic Demand: E d = 0.50 $1, Price Quantity Sold Total Revenue $1,000 1,080

50 Using price elasticity of demand: the behavior of total revenue Elastic versus Inelastic Demand TABLE 5.6 Price Elasticity and Total Revenue Elastic Demand: E d > 1.0 If price Total revenue Because the percentage change in quantity is Larger than the percentage change in price. Larger than the percentage change in price. Inelastic Demand: E d < 1.0 If price Total revenue Because the percentage change in quantity is Smaller than the percentage change in price. Smaller than the percentage change in price.

51 Demand Schedule and Total Revenue Price $10 98 Elastic Unit-elastic 7 6 Inelastic D Total Quantity revenue $ Demand Schedule and Total Revenue for a Linear Demand Curve Quantity Total Price demanded Revenue $ $ Quantity The price elasticity of demand changes along the demand curve Demand is elastic: a higher price reduces total revenue Demand is inelastic: a higher price increases total revenue 51

52 Demand Schedule and Total Revenue: a formal note R = p q ( p) Differentiating with respect to p, we have: dq ( p ) dr = p + q ( p ) > 0 dp dp 52

53 p dq ( p ) dq ( p ) dr = p + q ( p ) = q 1 + = q (1 + ε q, p ) dp dp q dp that is, as we have seen on the graph: ( dr = q 1 ε q, p dp ) 53

54 54

55 OTHER ELASTICITIES OF DEMAND Income Elasticity of Demand Income elasticity of demand A measure of the responsiveness of demand to changes in consumer income; equal to the percentage change in the quantity demanded divided by the percentage change in income. 55

56 OTHER ELASTICITIES OF DEMAND Cross-Price Elasticity of Demand Cross-price elasticity of demand A measure of the responsiveness of demand to changes in the price of another good; equal to the percentage change in the quantity demanded of one good (X) divided by the percentage change in the price of another good (Y). TABLE 20.8 Income and Cross-Price Elasticities for Different Types of Goods This elasticity Is Positive for Is Negative for Income elasticity Normal goods Inferior goods CrossCross-price elasticity Substitute goods Complementary goods 56

57 APPLICATION Where do I find estimates of elasticities of demand? The U.S. Department of Agriculture has a Web site that provides estimates of demand elasticities for hundreds of food products in dozens of countries: Clicks (1) Demand Elasticities from Literature; (2) Choose Country; Choose Commodity; (3) Cross Commodity; (4) Submit. It is important to note two things about the reported elasticities. First, the regular price elasticity is reported as a negative number and labeled own price elasticity for Marshallian Demand. Second, the reported expenditure elasticity is similar to the income elasticity, with the denominator of the elasticity equal to the percentage change in total consumer expenditure (versus percentage change in income) 57

58 THE PRICE ELASTICITY OF SUPPLY Price elasticity of supply A measure of the responsiveness of the quantity supplied to changes in price; equal to the percentage change in quantity supplied divided by the percentage change in price. 58

59 Supply curves with different price elasticity of supply P S1 P0 O Q0 59 Q

60 Supply curves with different price elasticity of supply P S1 S2 P1 P0 O Q0 Q1 Q2 60 Q

61 (A) The supply curve is relatively steep. A 20 percent increase in price increases the quantity supplied by 2 percent, implying a supply elasticity of (B) The supply curve is relatively flat. A 20 percent increase in price increases the quantity supplied by 50 percent, implying a supply elasticity of

62 Price Elasticity of Supply Measuring price elasticity of supply % QS / % P elastic and inelastic supply Determinants of price elasticity of supply amount that costs rise as output increases time period 62

63 Q If a rise in the price of good X results in the amount of money spent on good Y remaining the same, then: A. X & Y are perfect substitutes. B. X & Y are perfect complements. C. The cross-price elasticity of 20% 20% 20% 20% 20% demand for Y with respect to X is infinite. D. The cross-price elasticity of demand for Y with respect to X is 1. E. The cross-price elasticity of demand for Y with respect to X is 0. A. B. C. D. 63 E.

64 64

65 65

66 USING ELASTICITIES TO PREDICT CHANGES IN PRICES The Price Effects of a Change in Demand Under what conditions will an increase in demand cause a relatively small increase in price? Small increase in demand. Highly elastic demand. Highly elastic supply. 66

67 USING ELASTICITIES TO PREDICT CHANGES IN PRICES The Price Effects of a Change in Demand An increase in demand shifts the demand curve to the right, increasing the equilibrium price. In this case, a 35 percent increase in demand increases the equilibrium price by 10 percent. Using the price-change formula, 10% = 35% / ( ). 67

68 USING ELASTICITIES TO PREDICT CHANGES IN PRICES The Price Effects of a Change in Supply Under what conditions will a decrease in supply cause a relatively small increase in price? Small decrease in supply. Highly elastic demand. Highly elastic supply. 68

69 USING ELASTICITIES TO PREDICT CHANGES IN PRICES The Price Effects of a Change in Supply An import restriction on shoes decreases the supply of shoes, shifting the market supply curve to the left and increasing the equilibrium price from $40 to $44. In this case, a 30 percent reduction in supply increases the equilibrium price by 10 percent. Using the pricechange formula, 10% = ( 30% / ( )). 69

70 An Elasticity Menagerie 70

71 An Elasticity Menagerie 71