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Principles of Economics: Part How Markets Works Chapter5 Elasticity and Its Application 2010/3/28 (Sun)
Principles of Economics: Part How Markets Works Chapter5 Elasticity and Its Application 2010/3/28 (Sun)
PartⅡ How markets works
Chapter5 Elasticity and Its Application
2010/3/28(Sun)
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Index
Ø 1 The elasticity of demand
2
Key Concepts
Ø elasticity
Ø elastic and inelastic
Ø price elasticity of demand
Ø income elasticity of demand
Ø cross price elasticity of demand
Ø price elasticity of supply
Ø total revenue
3
0. How would consumers respond to the higher price of
gasoline?
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1.1.1 elastic and inelastic
elastic inelastic
Goods with close
1Goods without close
1
substitues
substitues(eggs)
(butter and margarine)
2
Luxuries (sail boats) Necessities (doctor)
3
Narrowly defined markets Broadly defined market
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Long term Short term 6
1.1.2 Computing the price elasticity of demand
price elasticity of demand=
Percentage change in quantity demanded
Percentage change in price
ex) a 10% increase in the price of an increase of an ice-cream
causes the amount of ice cream to fall by 20 %
20 percent
→Price elasticity of demand
=2
10 percent
※common practice of dropping the minus sign and reporting
all price elasticity of demand as positive number(absolute
value)
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1.1.3 An annoying problem of the culculation for elasticity
Quantit
Point Price
y
A 4 120
B 6 80
elasticity
A to B 33/50(=0.66)
B to A 50/33(=1.5)
8
1.1.4 Mid Point Method
(Q2 − Q1 ) /[(Q2+Q1)/ 2]
( P2 − P1 ) /[( P2+P1 )/2]
The mid point method gives the same answer regardless of the
direction of change.
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1.2.1 The variety of demand curves1
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1.2.2 The variety of demand curves 2
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1.3.1 Total revenue and the price elasticity of demand
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1.3.2 Price and total revenue
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1.3.3elasticity and total revenue along a linar demand curve
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1.3.4 elasticity is not constant
even if the slope of the demand curve is?
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1.4 Other demand elasticity
ex) a 10% increase in the price of milk raise milk the amount
the amount that farmers produce by 20 %
→Price elasticity of supply
20 percent = 2
10 percent
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2.2 the variety of supply curves
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3 Three questions about applications of
supply,demand and elasticity
• Can good news for farming be bad news for
farmers?
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3.1.1Can good news for farming be bad news for farmers?
• Researchers have devised a new hybrid of wheat that raises the amount
farmrs can produce.
→the quantity of wheat sold increases and price of wheat falls owing to the
supply curve shifting to the right.
→Does the discovery make farmers better off??Whether total revenue
rises or falls depends on the elasticity of demand.
→Wheats is usually inelastic.Thus, total revenue of farmers falls because of
the discovery of the new hybrid!!Farmers are worse off!! So, what??
■Adavnces in farm technology
1 increase in food supply.
2 caused farm revenue to fall.
3 encouraged people to leave farming.
※Despite the 70 percent drop in the number of farmers,U.S. farmers now
produce more than twice the output of crops and livestock tha they did
in 1950.
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3.1.2 Implication from example of Adavnces in farm technology
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3.2 Why did OPEC fail to keep the price of oil high?
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3.3.1 Does drug interdiction increase or decrease
drug-related crime?
Ø Drug interdicition reduces quantity of drug supplied at any
given price.
Ø The demand for drug is not changed.
→The fall in the equilibrium quantity shows that drug
interdiction does reduce drug use.
But,what about the amount of drug-related crime?
If demand is inelastic,then an increase in price raises total
revenue in the drug revenue.
→Addicts who already had to steal to support their habits
would have an even greater need for quick cash.
→
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3.3.2 Drug related crime in the short run and the long run
Ø Supply is more elastic in the long run than in the shot run.
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