Economics II – 1st session (08.05.

24)

Micro economics / Macro-economic difference affecting the society

Price elasticity

E x p = Ax/x / ap/p = Ax / Ap * P/x

Bus ticket 3 Demand 100, Bus ticket 5 Demand 80

Bus ticket 3/100 -20/2 (differential) = -0.3

Price increase demand decrease and vice versa

Price change doesn’t lead to much change in demand and supply

Price elastic / Price inelastic

Point Elasticity – d p = 8 – 2p

Ex p = D x / Dp * p / x

2/-1 * 2/4 = -1

-4/2 * 2/4 (start from the middle point)

-2/-1 * 3/2 = 3

Perfectly elastic ep = Infinite (price change)

Income elasticity of demand: ‘ratio

Price elasticity – Ordinary good (elastic & inelastic) (demand) / Giffen good Price increase – Quantity
increases (milk, potato)

Income elasticity - (+ normal goods (luxury goods) Ex p > 1

1 ? E1 1 > 0

– Inferior goods) Income increases population does not buy it.

E qi,m = Dqi/m * m/q1

M = 2000 $

X = 20 steaks

M = 3000 $

X = 40

20/1000 * 2000/20 = 2
Cross price elasticity of demand (subtitutes + & complimentary -) diff of short run and long run

Ex31 Pa = Dxb/xb * pa/apx

Demand is negative and supply is positive.

Elasticity of supply

inelastic (Price increases and company will produce more)

Price increases and demand decreases by smaller percentage in the short run.

Inelastic supply labour (skilled and non-skilled)

Q1) Explain in your own words the concept of elasticity of demand.

The Elasticity of demand refers to the change in demand if there is change in any of the variables related
to it for example pricing, income, substitute products and change in complementary products.

Q2) Why is this concept important? Provide an example that the elasticity of demand is important if a
firm is optimizing profits. Draw graphs to explain your example.

The concept of elasticity of demand is important whenever the company is launching a new product

Demand elasticity determines the optimal price?

(examples of price elasticities, cross, income elasticities) Homework.

c) If the price is 100 a company sells 120 units of chocolate. If the price is 150 the company sells only 80
units of chocolate. What is the price elasticity of chocolate in this example?

C1 : Q = 120 Price 100

P = 150 Q = 80

-40/30 * 100/120 = -0.67

If the Price increases by 1% demand decreases by 0.67% (inelastic)

e) With a price for pineapple (pj) of 80, 120 units of grapes are sold. If the price for pineapples increases
to 100, the sale of grapes increases to 140 units. Analyze the situation analytically and verbally.

Price 80 grapes 120

Price 100 grapes 140

20/20 *80/120 = 0.6

If the prices decrease by 1% demand increases by 0.6%

G) g) With an income m of 4.500 the demand for steaks per year is 20. With an income of 4.000 the
demand for steaks is only 10. Analyze the situation analytically and verbally.

20 price

Quantity 40

20/-10 * 10/20 = 1

40 – 2p

Price is 0

And demand is 40

X2 convex

Uxy three dimensional space x y u

If u is constant then it is again three dimensional