1 further topics in supply and demand chapters 5 & 7
TRANSCRIPT
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Further Topics in Supply and Demand
Chapters 5 & 7
Price Elasticity of Demand
Percent change in quantity demanded divided by percent change in price.
The flatter the slope of the demand curve, the more …
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Price Elasticity of Supply
Same idea.
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Mid-Point Formula forPrice Elasticity
Figure 1 The Price Elasticity of Demand
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(a) Perfectly Inelastic Demand: Elasticity Equals 0
$5
4
Quantity
Demand
1000
1. Anincreasein price . . .
2. . . . leaves the quantity demanded unchanged.
Price
Figure 1 The Price Elasticity of Demand
(b) Inelastic Demand: Elasticity Is Less Than 1
Quantity0
$5
90
Demand1. A 22%increasein price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100
Figure 1 The Price Elasticity of Demand
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2. . . . leads to a 22% decrease in quantity demanded.
(c) Unit Elastic Demand: Elasticity Equals 1
Quantity
4
1000
Price
$5
80
1. A 22%increasein price . . .
Demand
Figure 1 The Price Elasticity of Demand
(d) Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
1000
Price
$5
50
1. A 22%increasein price . . .
2. . . . leads to a 67% decrease in quantity demanded.
Classification of elasticity measures
Absolute value < 1, INELASTIC
Absoute value > 1, ELASTIC
Absolute value = 1, UNIT ELASTIC
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Computing the Price Elasticity of Demand
Elastic or inelastic?
$5
4Demand
Quantity1000 50
-3percent 22-percent 67
5.00)/2(4.005.00)-(4.00
50)/2(10050)-(100
ED
Price
Factors Affecting Elasticity of Demand
• Availability of close substitutes
• Necessities versus luxuries
• Definition of the market
• Time horizon
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Revenue
PQ
Figure 2 Total Revenue
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Demand
Quantity
Q
P
0
Price
P × Q = $400(revenue)
$4
100
Figure 3 How Total Revenue Changes When Price Changes: Inelastic Demand
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Demand
Quantity0
Price
Revenue = $100
Quantity0
Price
Revenue = $240
Demand$1
100
$3
80
An Increase in price from $1 to $3 …
… leads to an Increase in total revenue from $100 to $240
Figure 4 How Total Revenue Changes When Price Changes: Elastic Demand
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Demand
Quantity0
Price
Revenue = $200
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
An Increase in price from $4 to $5 …
… leads to an decrease in total revenue from $200 to $100
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Other Elasticity Measures
1. Elasticity of supply
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Other Elasticity Measures
2. Cross-price elasticity
Negative for complements
Positive for substitutes
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Other Elasticity Measures
3. Income elasticity
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Income elasticity
Positive for normal goods
Negative for inferior goods
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Applications of Elasticity
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Bumper Crops
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OPEC & Oil Prices
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Demand is said to be inelastic if thea. quantity demanded changes proportionately
more than the price.b. quantity demanded changes proportionately
less than the price.c. price changes proportionately more than
income.d. quantity demanded changes proportionately
the same as the price.
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Consumers, Producers, and the Efficiency of Markets
Chapter 7
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Economic Welfare
Welfare of buyers: consumer surplus.Welfare of suppliers: producer surplus.What price and quantity in a market
maximizes the sum of the two?That’s the efficient allocation.
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Consumer Surplus
Table 1 Four Possible Buyers’ Willingness to Pay
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The Demand Schedule and the Demand Curve
Figure 1 The Demand Schedule and the Demand Curve
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Price ofAlbum
0 Quantity ofAlbums
Demand
1 2 3 4
$100 John’s willingness to pay
80 Paul’s willingness to pay
70 George’s willingness to pay
50 Ringo’s willingness to pay
Figure 2 Measuring Consumer Surplus with the Demand Curve
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(a) Price = $80
Price ofAlbum
50
70
80
0
$100
Demand
1 2 3 4 Quantity ofAlbums
John’s consumer surplus ($20)
Figure 2 Measuring Consumer Surplus with the Demand Curve
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(b) Price = $70Price of
Album
50
70
80
0
$100
Demand
1 2 3 4
Totalconsumersurplus ($40)
Quantity ofAlbums
John’s consumer surplus ($30)
Paul’s consumersurplus ($10)
Figure 3 How the Price Affects Consumer Surplus
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Consumersurplus
Quantity
(a) Consumer Surplus at Price P
Price
0
Demand
P1
Q1
B
A
C
Figure 3 How the Price Affects Consumer Surplus
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Initialconsumer
surplus
Quantity
(b) Consumer Surplus at Price P
Price
0
Demand
A
BC
D EF
P1
Q1
P2
Q2
Consumer surplusto new consumers
Additional consumersurplus to initial consumers
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P2
P1
Q2 Q1
Demand
A
BC
D F
Quantity
Price
What is the consumer surplus at P1 and at P2?
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Producer Surplus
Table 2 The Costs of Four Possible Sellers
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The Supply Schedule and the Supply Curve
Figure 4 The Supply Schedule and the Supply Curve
Figure 5 Measuring Producer Surplus with the Supply Curve
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Quantity ofHouses Painted
Price ofHouse
Painting
500
800
$900
0
600
1 2 3 4
(a) Price = $600
Supply
Grandma’s producersurplus ($100)
Figure 5 Measuring Producer Surplus with the Supply Curve
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Quantity ofHouses Painted
Price ofHouse
Painting
500
800
$900
0
600
1 2 3 4
(b) Price = $800
Georgia’s producersurplus ($200)
Totalproducersurplus ($500)
Grandma’s producersurplus ($300)
Supply
Figure 6 How the Price Affects Producer Surplus
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Producersurplus
Quantity
(a) Producer Surplus at Price P
Price
0
Supply
B
A
C
Q1
P1
Figure 6 How the Price Affects Producer Surplus
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Quantity
(b) Producer Surplus at Price P
Price
0
P1B
C
Supply
A
Initialproducersurplus
Q1
P2
Q2
Producer surplusto new producers
Additional producersurplus to initialproducers
D EF
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When the market for a good is in equilibrium,a. consumer surplus will equal producer
surplus.b. the total value created for consumers will
equal the total cost of production for business firms.c. all units valued more highly than the
opportunity cost of production will be supplied.d. all units that have value will be produced,
regardless of their cost of production.
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Market Efficiency
What happens to CS and PS if price is different from the equilibrium price?
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Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
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Efficiency
The property of resource allocation of maximizing the total surplus received by all members of society.
Total surplus = CS + PS
= (value to buyers – amount paid by buyers)
+ (amount received by sellers – cost to sellers)
= value to buyers – cost to sellers
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Efficiency Equity
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If Harry only pays $25,000 to purchase a new car even though he would have been willing to pay as much as $35,000 for the car, this indicates thata.Harry is an irrational consumer.b.The seller earned a $10,000 profit on the sale of the car.c.Harry reaped $10,000 of consumer surplus from thetransaction.d. The seller received $10,000 worth of producer surplus on the transaction.