Demand and Elasticity (PowerPoint)

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					               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

				
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posted:2/9/2012
language:English
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