# 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
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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 views: 7 posted: 2/9/2012 language: English pages: 14