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Unit 2: Supply, Demand, and Consumer Choice
Supply and Demand Review 1. Define the Law of Demand2. Define the Law of Supply3. What is the difference between a change in
demand and a change in quantity demanded?
HOW MUCH MORE OR LESS?
THE LAW OF DEMAND SAYS...
Consumers will buy more when P and less when prices
3
ElasticityElasticity shows how much quantity will
change, when price changes.
1. Elasticity of DemandElasticity of Demand-
• Measurement of consumers change in QD (quantity demanded) when P (price) changes.
• What will happen if P ? How much will it effect QD
Inelastic Demand
Inelastic Demand
•If price , QD will fall a little•If price , QD increases a little.
~people will continue to buy it.
20%
5%
INelastic = Quantity changes little to a change in price.
Examples:•Gasoline•Milk
A INELASTIC demand curve is steep! (looks like an “I”)
•Medical Care•Toilet paper
Inelastic Demand
20%
5%
General Characteristics of INelastic Goods:
•Few Substitutes•Necessities•Required now
• Elasticity coefficient( 系数 ) < 1
Elastic Demand
Elastic Demand
•If price, QD will fall a lot•If price, QD increases a lot.
Price changes little~ QD changes a lot
Elastic = Quantity is sensitive to a change in price.
An ELASTIC demand curve is flat!Examples:•Soda•Cars•Beef
•Pizza•Gold
Elastic DemandGeneral Characteristics of
Elastic Goods:• Many Substitutes• Luxury goods• Large part of income• Lots of time to decide
•Elasticity coefficient > than 1
Price Elasticity of Demand
Price elasticity of demand equals
P
Q
D
Q2
P2
P1
Q1
P rises by 10%
Q falls by 15%
15%
10%= 1.5
Price elasticity of demand
=% change in Qd
% change in P
Example:
Calculating Percentage Changes• we use the midpoint method:
P2 – P1(P2 + P1)/2
x 100%% change in P =
% change in Q = Q2 – Q1(Q2 + Q1)/2
x 100%
1. Calculating Percentage Changes
• Using the midpoint method, the % change in P equals
$250 – $200$225
x 100% = 22.2%
P1 200 Q1 8P2 250 Q2 12
% change in P = P2 – P1(P2 + P1)/2
x 100%
1. Calculating Percentage Changes
The % change in Q equals
12 – 8
10x 100% = 40.0%
P1 200 Q1 8P2 250 Q2 12
% change in Q = Q2 – Q1(Q2 + Q1)/2
x 100%
1. Calculating Elasticity• Using the midpoint method, the % change
in P equals
The price elasticity of demand equals
40/22.2 = 1.8
% Δ Q % Δ P
= Elasticity Coefficient
Elasticity Coefficients
Elasticity Coefficients:Greater than 1 = Elastic (ΔP < ΔQ)Less than 1 = Inelastic (ΔP > ΔQ) = 1= Unit Elastic (ΔP = ΔQ)
ACTIVE LEARNING ACTIVE LEARNING 1
Calculate an elasticityCalculate an elasticity
Use the following information to calculate the price elasticity of demand for hotel rooms:
if P = $70, Qd = 5000
if P = $90, Qd = 3000
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ACTIVE LEARNING ACTIVE LEARNING 1
AnswersAnswers
Use midpoint method to calculate % change in Qd
(5000 – 3000)/4000 = 50%
% change in P
($90 - $70)/$80 = 25%
The price elasticity of demand equals
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
50%25%
= 2.0
Elastic or Inelastic?Beef-
Gasoline- Real Estate-
Medical Care- Electricity-
Gold-
Elastic- 1.27INelastic - .20Elastic- 1.60INelastic - .31INelastic - .13Elastic - 2.6
What about the demand for medicine?
Perfectly INELASTIC(Coefficient = 0)
What if % change in quantity demanded equals
% change in price?
Unit Elastic (Coefficient =1)45 Degrees
Total Revenue TestUses elasticity to show how changes in price will
affect total revenue (TR). (TR = Price x Quantity)
Elastic Demand- • Price increase causes TR to decrease• Price decrease causes TR to increase
Inelastic Demand- • Price increase causes TR to increase• Price decrease causes TR to decrease
Unit Elastic-• Price changes and TR remains unchanged
Ex: If demand for milk is INelastic, what will happen to expenditures on milk if price increases?
Is the range between A and B, elastic, inelastic, or unit elastic?
A
B
10 x 100 =$1000 Total Revenue
5 x 225 =$1125 Total Revenue
Price decreased and TR increased, so…
Demand is ELASTIC
125%
50%
2. Price Elasticity of SupplyElasticity of Supply- • Elasticity of supply shows how sensitive producers
are to a change in price.
Elasticity of supply is based on time limitations.Producers need time to produce more.
INelastic = Insensitive to a change in price (Steep curve)• Most goods have INelastic supply in the short-run Elastic = Sensitive to a change in price (Flat curve)• Most goods have elastic supply in the long-runPerfectly Inelastic = Q doesn’t change (Vertical line)• Set quantity supplied
1.Demand2.Substitute3.Elastic4.Total Revenue Test
1.Supply 2.Inelastic3.Elasticity Coefficient
Elasticity Practice
27