using supply and demand 4 ©2014 cengage learning. all rights reserved. may not be scanned, copied...

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1

Using Supplyand Demand4


2

• Price elasticity of demand, ED • _________________ of quantity demanded

to a change in __________• Percentage ________ in quantity demanded

_________ by the percentage change in price

Price Elasticity of Demand


3

• Elastic demand• Quantity ________ is responsive to even a

small change in price• Inelastic demand• A huge change in ________ results in only a

_______ change in quantity demanded



4

• Elastic demand, ED > 1• __________ change in quantity demanded is

greater than the percentage change in _____• Perfectly elastic demand, ED = ∞• The demand curve is horizontal• Even the ________ change in price will lead

to a huge change in quantity ____________



5

Elastic DemandEXHIBIT 4.1

a. Elastic Demand (ED > 1) b. Perfectly Elastic Demand (ED = ∞)

Pric

e

Quantity

0

P2

P1

Demand

Q2 Q1

10%∆ 𝑃 Pric

e

Quantity

0

P1 Demand

𝐸𝐷=%∆𝑄𝐷

%∆ 𝑃=0.200.10

=2


6

• __________ demand, ED < 1• Percentage change in quantity demanded is

less than the __________ change in price• Perfectly inelastic demand, ED = 0• The demand curve is ___________• The quantity demanded ______ _____

respond to a change in price• Unit _________ demand, ED = 1• Percentage change in ________ demanded is

equal to the percentage change in ______



7

Inelastic DemandEXHIBIT 4.2

a. Inelastic Demand (ED < 1) b. Perfectly Inelastic Demand (ED = 0)

Pric

e

Quantity

0

P2

P1

Demand

Q2 Q1

10%∆ 𝑃 Pric

e

Quantity

0

Demand

Q1 = Q2

P2

P1

20%∆ 𝑃


%∆𝑃=0.050.10

=0.5


8

Unit Elastic DemandEXHIBIT 4.3

Pric

e

Quantity

0

P2

P1


%∆ 𝑃=0.100.10

=1

10%∆ 𝑃

Demand

Q2 Q1


9

Short-Run and Long-Run Demand CurvesEXHIBIT 4.4

Pric

e of

Gas

olin

e

Quantity of Gasoline

0

P2

P1

DSR

DLR

Q1QSRQLR


10

Price Elasticities of Demand for Selected GoodsEXHIBIT 4.5


11

• Total Revenue, • _______ sellers receive for a good or service• Price of the _____ (P) times the quantity of

the good _______ (Q)• Elasticity of demand • Help to _______ how changes in the price

will _______ total revenue

Total Revenue and Price Elasticity of Demand


12

• When the demand is price elastic, • Percentage ______ in quantity demanded is

greater than percentage change in price• Total revenues will ____ as the price declines• Total revenue will ____ as the price increases



13

Elastic Demand and Total RevenueEXHIBIT 4.6

DELASTIC

Pric

e

Quantity

0 20 40 60 80 100

$10

$5

A

B

a ($200)

b ($200)

c ($300)


14

• When the demand is price inelastic, • Percentage change in quantity demanded is

_______ than percentage change in price• Total revenues will ____ as the price declines• Total revenue will ____ as the price increases



15

Inelastic Demand and Total RevenueEXHIBIT 4.7

DINELASTIC

Pric

e

Quantity

0 10 20 30 40

$10

$5

A

B

a ($150)

b ($150)

c ($50)


16

a

b c

Price Elasticity along a Linear Demand CurveEXHIBIT 4.8

Demand

Pric

e

Quantity

0

P1

P2

a. Elastic Range b. Inelastic Range

Q1 Q2

ED = 1Unit elastic

ED > 1; Elastic

d

e f Demand

Pric

e

Quantity

0

P3

P4

Q3 Q4

ED = 1; Unit elastic

ED < 1; Inelastic


17

• Price elasticity of supply, ES • __________ of quantity supplied to a change

in price• Percentage change in quantity ________

divided by the percentage change in price

Price Elasticity of Supply


18

• Elastic supply, ES > 1• Percentage change in quantity supplied is

_______ than the percentage change in price• Inelastic supply, ES < 1• Percentage ______ in quantity supplied is less

than the percentage change in price• Perfectly elastic supply, ES = ∞• The supply curve is __________• The price does not change at all



19

• Perfectly inelastic supply, ES = 0• The supply curve is _________• An increase in price will not change the

quantity __________• Time: ________ in supply elasticities• Supply tends to be more _______ in the long

run than in the short run



20

The Price Elasticity of SupplyEXHIBIT 4.9

a. Elastic Supply (ES > 1) b. Inelastic Supply (ES < 1)

Pric

e

Quantity

0

P2

P1

Supply

Q2Q1

10%∆ 𝑃

𝐸𝑆=%∆𝑄𝑆

%∆ 𝑃=0.200.10

=2

Pric

e

Quantity

0

P2

P1

Supply

Q2Q1

10%∆ 𝑃

𝐸𝑆=%∆𝑄𝑆

%∆𝑃=0.050.10

=0.5


21

Supply

Q1

The Price Elasticity of SupplyEXHIBIT 4.9

c. Perfectly Inelastic Supply (ES = 0) d. Perfectly Elastic Supply (ES = ∞)

Pric

e

Quantity

0

P2

P1

20%∆ 𝑃

Pric

e

Quantity

0

SupplyP1


22

Short-Run and Long-Run Supply CurvesEXHIBIT 4.10

Pric

e

Quantity

0

P2

P1

SSR

SLR

Q1 QSR QLR


23

• Consumer surplus • Difference between the price a ____________ is willing and able to pay

• For an additional unit of a good • And the price the consumer actually pays

• Consumer surplus for the whole market• _____ of all the individual consumer surpluses

• Marginal willingness to pay • Falls as greater quantities are _____________• In any period

• Demand curve• A marginal benefit curve

• Additional benefit ________ from consuming one more unit

Consumer Surplus


24

Consumer SurplusEXHIBIT 4.20

Quantity of Chocolate(billions of pounds per year)

Pric

e

0

Consumer surplusin the market

Market priceP1

MarketDemand

Q1

Marginal willingnessto pay for last unit


25

Impact of an Increase in Supply on Consumer SurplusEXHIBIT 4.21

Quantity of Chocolate(billions of pounds per year)

Pric

e

0

Q1 can now be purchasedat a lower price

P2

MarketDemand

Q2

A lower price makes itadvantageous for buyers toexpand their purchases

S1

S2

P1

Q1

B

CD

A


26

• Producer surplus • Difference between what a ________ is paid for a good and the cost of

producing one unit of that ________

• Supply curve is the marginal cost curve• Reflects the marginal cost to sellers

• Cost of producing ______ more unit of a good• Change in _______ costs resulting from a one-unit change in output

• Producer surplus for the market• Sum of all the producer surpluses of all the sellers• Area above the _________ supply curve and below the market price

• Up to the quantity actually produced• How much sellers gain from trading in the market

Producer Surplus


27

ProducerSurplus

Market Producer SurplusEXHIBIT 4.23

Quantity per Week

Pric

e

0

Market price$5

MarketSupply

50,000


28

Impact of an Increase in Demand on Producer Surplus

EXHIBIT 4.24

Quantity

Pric

e

0

A higher price for quantityalready being produced

P1

D1

Q2

Expansion of output fromQ1 to Q2 made profitablebecause of higher price

Market Supply

P2

Q1

B

AD2

DC


29

• Demand curve• ____________ prices that consumers are willing and able to pay

• For additional quantities of a good or service• ___________ benefits derived by consumers

• Supply curve• ___________ prices that suppliers require to be willing and able to supply

• Each additional unit of a good or service• Marginal cost of production

• Market equilibrium• Marginal benefit to ________ is equal to the marginal cost to producers, MB = MC• Maximize total welfare gains• Market efficiency

• Total welfare gains • Sum of consumer and producer __________

• Deadweight loss • Net loss of total surplus that results from an action that alters a market equilibrium

Market Efficiency


30

Consumer and Producer SurplusEXHIBIT 4.25

MarketDemand = MB

MarketSupply = MC

E

C

DB

ACS

CSCS

PSPS

PS

MB > MCOutputtoo low

MC > MBOutput

too high

1 2 3 4 5Quantity

(millions of units/year)

Pric

e

$8

7

6

5

4

3

2

1

0


31

• Super Bowl • High-demand, _______-supply sports event• At the face value for the tickets• Quantity demanded far ________ the quantity

supplied• Fans are willing to pay much ______ prices to

scalpers

Efficiency and Ticket Scalping


32

• __________• Voluntary activity that benefits both buyers

and sellers• Helps markets achieve efficient outcomes• Transfer tickets from those placing lower values

on them • To those placing higher values on them

• ________ of the event are the losers

Efficiency and Ticket Scalping


33

Demand

The Market for Super Bowl TicketsEXHIBIT 4.26

Quantity of Super Bowl Tickets

Pric

e pe

r Tic

ket

0

Supply

QS QD

PE

P1

Shortage

using supply and demand 4 ©2014 cengage learning. all rights reserved. may not be scanned, copied...

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