Document Sample

Demand Curves • Deriving Demand Curves from Indifference Curves • Law of Demand • Ceteris Paribus Assumption • Shifts in Demand Curves – A Change in Demand • Movements along a Demand Curve – A Change in Quantity Demanded • Elasticity – Price – Income – Cross Price • Market Demand Curves • Consumer Surplus Deriving a Demand Curve Price Consumption Curve (or Price Expansion Path) E* E3 E4 E1 E2 Good X We can show the effects of changing prices on the consumption of good X (and also Y). We can trace the consumption path as shown above. The Price Consumption Curve is consistent with a Demand Curve for various Prices Demand Curves Price of X E E1 E2 E3 E4 D Quantity of X Shifts and Movements in Demand Curves Price of Good X P1 A C P2 B D2 D1 Quantity of X Q1 Q 2 Q 2’ • What is A to B? • What is A to C? • What causes each? Elasticity: Measuring Consumer Responses to Change • Elasticity is a means of measuring consumer response to changes in relevant variables. We focus on elasticity measures which give information about the response of demand to changes. • The formulation of elasticity is a unitless measure. We calculate it as the ratio of proportions. • Price Elasticity of Demand is: D %Qd %P Elasticity of Demand • Elasticity is the Percentage Change in Quantity Demanded divided by the Percentage Change in Price • In use we can calculate this is two different forms: • Arc Elasticity--the response of demand over a range of prices. The basic formula is adapted to consider the two price-quantity combinations. This is called the mid-point formula. Q1 Q2 Q1 Q 2 d 2 P P 1 2 P P2 1 2 Elasticity of Demand • Point Price Elasticity--This second form is based upon the response to changes in (and around) a single price-quantity combination. • This is calculated from rearranging the basic elasticity formula: Q P d Q P •The first part is the slope of the demand function (i.e., Q=a+bP, this is b). The second is simply the price and quantity. Elasticity of Demand: An Example • Consider the following example: • Q = 100 - 4P • For this demand function, find the elasticity of demand at: – P= 10 – P= 20 – between P= 10 and 20 Elasticity Relationships Price of Good X P1 A P2 B D1 Quantity of X Q1 Q2 Elasticity Relationships Price of Good X What can we say about the value of elasticity along a (linear) demand curve? E P D1 Quantity of X Q Elasticity Relationships Price of Good X How does elasticity vary as we change price (and Q)? P E D1 Revenue Quantity of X Q Total Revenue Quantity of X Elasticity and Pricing • How can the elasticity value be used to help in setting the appropriate price? • Firms wishing to maximize profit determine price by producing the output where MR=MC • The relationship between MR and Price is determined by the expression • MR = P(1 + 1/) • Thus, we can just substitute MC for MR or • MC = P(1 + 1/) Other Demand Elasticity Measures • Income Elasticity – Formula – Use of income elasticity to classify goods • Cross Price Elasticity – Formula – Use of cross elasticity to classify goods %Qd % Q x I xy d %I % Py Using Price Elasticity • How can this information be used? • Help determine what will happen based upon a given change in the price of a good • Useful in knowing about the effects of other events (e.g., macroeconomic factors) on demand in a market [Income elasticity would be useful here, too] • Pricing relationships • What are the determinants of price elasticity? – Degree of necessity – proportion of budget spent on good [relation to income] – ability to find suitable substitutes • Relationship between these ideas and the demand function

DOCUMENT INFO

Shared By:

Categories:

Tags:

Stats:

views: | 7 |

posted: | 2/9/2012 |

language: | English |

pages: | 14 |

OTHER DOCS BY ewghwehws

Docstoc is the premier online destination to start and grow small businesses. It hosts the best quality and widest selection of professional documents (over 20 million) and resources including expert videos, articles and productivity tools to make every small business better.

Search or Browse for any specific document or resource you need for your business. Or explore our curated resources for Starting a Business, Growing a Business or for Professional Development.

Feel free to Contact Us with any questions you might have.