demand and supply application and elasticity
TRANSCRIPT
DEMAND AND SUPPLY
(APPLICATIONS )
ELASTICITY
Chapter 4 and 51
Price Rationing The process by which the
market system allocates goods and services to
consumers when quantity demanded exceeds
quantity supplied.
The lower total supply is rationed to those who
are willing to pay higher for it.
Price Ceiling : Maximum price that seller may
charge for a good
2
Quantity
S
Market for rare painting
D
25 l
1
3
DISCUSSED
The direction in which the quantity demanded
moves, but not the size of the change.
To measure how much demand responds
to changes in its determinants, economists use
the concept of elasticity.
4
Elasticity a measure of the responsiveness of
quantity demanded or quantity supplied to one of
its determinants
Price elasticity of demand a measure of how
much the quantity demanded of a good responds
to a change in the price of that good, computed as
the percentage change in quantity demanded
divided by the percentage change in price
5
COMPUTING THE PRICE
ELASTICITY OF DEMAND
6
Quantity
D0
VARIETY OF DEMAND CURVES
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ELASTICITY OF DEMAND
Product %Change
in Price
% change
in Qd
Elasticity Type
Insulin +10% 0% 0 Perfectly
Inelastic
8
Quantity
D0
Perfectly Inelastic Demand
9
ELASTICITY OF DEMAND
Product %Change
in Price
% change
in Qd
Elasticity Type
Insulin +10% 0% 0 Perfectly
Inelastic
Cooking
Gas
+10% -1% -0.1 Inelastic
10
Quantity
D0
Perfectly Inelastic Demand
11
ELASTICITY OF DEMAND
Product %Change
in Price
% change
in Qd
Elasticity Type
Insulin +10% 0% 0 Perfectly
Inelastic
Cooking
Gas
+10% -1% -0.1 Inelastic
Potatoes +10% -10% -1.0 Unitarily
Elastic
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Quantity
D0
Unitarily elastic Demand
Note : steeper curve has the lower elasticity13
ELASTICITY OF DEMAND
Product %Change
in Price
% change
in Qd
Elasticity Type
Insulin +10% 0% 0 Perfectly
Inelastic
Cooking
Gas
+10% -1% -0.1 Inelastic
Potatoes +10% -10% -1.0 Unitarily
Elastic
Fruits +10% -30% -3.0 Elastic
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Quantity
D0
Elastic Demand
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Quantity
p0 D0
Perfectly elastic Demand
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Alternative Coefficient (E)
Perfectly Elastic E = ∞
Relatively Elastic 1 < E < ∞
Unitarily Elastic E = 1
Relatively Inelastic 0 < E < 1
Perfectly Inelastic E = 0
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DETERMINANTS
Necessities versus Luxuries
Availability of Close Substitutes
Definition of the Market
Time Horizon18
D
Quantity
0
p
q
A
TOTAL REVENUE AND THE PRICE
ELASTICITY OF DEMAND
The amount paid by
buyers and received by
sellers of a good,
computed as the price
of the good times the
quantity sold
TR = P X Q
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Effects of price increase on
a product with inelastic demand: x D TRQP
Effects of price increase on
a product with elastic demand: x D TRQP
EFFECT OF PRICE RAISE
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EFFECT OF PRICE CUT
effect of price cut on a product
with elastic demand: x D TRQP
effect of price cut on a product
with inelastic demand: x D TRQP
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INCOME ELASTICITY OF DEMAND
income elasticity of demand Measures the
responsiveness of demand to changes in
income.
incomein change %
demandedquantity in change % demand of elasticity income
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Qu
an
tity
Income0
The Relation Between Quantity Demanded and Income
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Qu
an
tity
y2y10
Zero income
elasticity
qm
Income
The Relation Between Quantity Demanded and Income
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Qu
an
tity
Income y2y10
Positive income elasticity
Zero income
elasticity
qm
The Relation Between Quantity Demanded and Income
25
THE CROSS-PRICE ELASTICITY OF
DEMAND
cross-price elasticity of demand A measure
of the response of the quantity of one good
demanded to a change in the price of another
good.
X
Y
of pricein change %
demanded ofquantity in change % demand of elasticity price-cross
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ELASTICITY OF SUPPLY
elasticity of supply A measure of the
response of quantity of a good supplied to a
change in price of that good. Likely to be
positive in output markets.
pricein change %
suppliedquantity in change % supply of elasticity
27
ELASTICITY OF LABOR SUPPLY
elasticity of labor supply A measure of the
response of labor supplied to a change in the
price of labor.
rate wagein the change %
suppliedlabor ofquantity in change % supply labor of elasticity
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S1
S2
S3
q1
p1
Quantity
Quantity
Quantity
[iii]. Unit Elasticity
[ii]. Infinite Elasticity
[i]. Zero Elasticity
Three Constant-elasticity Supply Curves
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IF COST OF COFFEE GOES UP CAN THE
SUPPLIERS PASS THE COST TO CONSUMERS?
If coffee is inelastic then – yes
If coffee is elastic the – no
Demand is inelastic then costs incurred can be
charged to consumers.
Demand is elastic then costs incurred cannot be
charged to consumers.
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CAN GOOD NEWS(Technology) FOR FARMING
BE BAD NEWS FOR FARMERS?
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ELASTICITY ALONG A LINEAR
DEMAND CURVE
The slope of a linear
demand curve is
constant, but its
elasticity is not.
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consumer surplus The difference between the
maximum amount a person is willing to pay for a
good and its current market price.
SUPPLY AND DEMAND AND
MARKET EFFICIENCY
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producer surplus The difference between the current
market price and the full cost of production for the firm.
SUPPLY AND DEMAND AND
MARKET EFFICIENCY
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DEAD WEIGHT LOSS
deadweight loss The net loss of producer and consumer
surplus from underproduction or overproduction.
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THE MIDPOINT METHOD
Calculate Percentage Change in Quantity
Demanded (% QD):
Calculate Percentage Change in Price (% P):
100% x 2 / ) (
-
21
12
100% x 2 / ) (
-
21
12
PP
PP
36
1. market equilibrium price per gardenburger is $12
2. If the price per gardenburger is $14, there is an excess supply
of 150 units in the market.
3. If the price per gardenburger is $6, there is an excess demand
of 450 gardenburgers.
4. In this market there will be an excess demand of 150
gardenburgers at a price of $10
5. In this market there will be an excess supply of 150
gardenburgers at a price of $14.
6. When there is an excess supply of a product in an unregulated
market, the Price tends to fall 37
PROBLEMS WITH GOVT. POLICIES
Rent Control in India
Minimum wages
Burden of tax on Buyers or Sellers
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