# Ch 4 APPLICATIONS OF SUPPLY AND DEMAND

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```					Ch 4 APPLICATIONS OF SUPPLY AND DEMAND

It’s all a matter of supply and demand

Predicting prices
• When demand increases in a market, prices rise and quantities exchanged increase. “By how much?” • How large are the responses to changes in the market, and upon what does this responsiveness depend?

Elasticity
• measures, in percentage terms, • the responsiveness of some economic variable to a change. • Price elasticity of demand describes the percentage change in quantity demanded of a product caused by some percentage change in its price. • Thus, price elasticity of demand helps us to describe movement along a demand curve. • Because it is expressed in percentage terms and is hence devoid of all scale measurements, it can be used to compare consumer responsiveness across goods and at different price levels.

Calculation formulas for Price elasticity of demand:
Ed between any two points on a demand curve=

percentage change in quantity demanded percentage change in price

SEE NOTES

Interpretation
absolute value.. • a. Demand is defined as elastic when the percentage change in quantity demanded is greater than the percentage change in price. (ED > 1) • b. Demand is defined as inelastic when the percentage change in quantity demanded is less than the percentage change in price. (ED < 1) • c. Demand is defined as unit elastic when the percentage change in quantity demanded is equal to the percentage change in price. (ED = 1)

Elastic Demand Shows Large Quantity Response to Price Change

Chapter 4 Figure 4-1

Chapter 4 Figure 4-2

Price Elasticity of Demand Falls into Three Categories

Chapter 4 Figure 4-3

Perfectly Elastic and Inelastic Demands

Chapter 4 Figure 4-4

Slope and Elasticity Are Not the Same Thing

Chapter 4 Figure 4-5

A Simple Rule for Calculating the Demand Elasticity

The demand for any good is more elastic when
1- there are more substitutes available. 2- when the item is considered to be more a luxury than a necessity 3- when a longer time frame is considered. since a longer time frame allows consumers to search more carefully for substitutes.

Price elasticity of demand along a demand curve

Chapter 5 Table 5-2

Price elasticity of supply
• Price elasticity of supply describes how much quantity supplied increases when the price of a product rises. • Thus, it helps us to describe movement along a supply curve.

Price elasticity of supply between any two points on a supply curve can be calculated :
ES = percentage change in quantity SUPPLIED percentage change in price

Chapter 4 Figure 4-6

Supply Elasticity Depends upon Producer Response to Price

The Supply for any good is more elastic when
there is greater flexibility in the production process 1.Such as when increases in output will not cause significant increases in the price of inputs. 2.Also when a longer time frame is considered

Chapter 4 Figure 4-7

Prices of Basic Farm Products Have Declined Sharply

Chapter 4 Figure 4-8

Agricultural Distress Results from Expanding Supply and Price-Inelastic Demand E is old equi

Chapter 4 Figure 4-9

Crop-Restriction Program Raise both Price and Farm Income

The incidence of an indirect tax
• The incidence of an indirect tax on consumers is greater when demand is more price inelastic than supply

Chapter 4 Figure 4-10

Gasoline Tax Falls on Both Consumer and Producer

Chapter 4 Figure 4-11

The Minimum Wage and Teenage Unemployment, 1947-2002

Chapter 4 Figure 4-12

Effects of a Minimum Wage

Chapter 4 Figure 4-13

Price Controls Produce Shortages

Chapter 4 Table 4-1

Chapter 4 Table 4-2

Chapter 4 Table 4-3

Income Elasticity
• %∆Q demanded/ %∆income (Y) •  (∆Q /AvgQ) ∆Y/AvgY) •  (∆Q / ∆Y)/(midway income/midway Q)
d d

Engels curve

Chapter 5 Table 5-3

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