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EC106FA98CH52

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Published on December 14, 2007

Author: Gourmet

Source: authorstream.com

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Chapter 5:  Chapter 5 Elasticity and Its Applications Deriving Market Demand :  Deriving Market Demand Price Moe Larry Curly Total $3 0 1 2 3 $2 1 2 3 6 $1 2 4 5 11 Market Demand:  Market Demand Price $3 $2 $1 Q 1 2 3 4 5 6 7 8 9 10 11 12 EC106 Demand For Milano Cookies:  EC106 Demand For Milano Cookies Price/Cookie Quantity $1 .00 015 .80 037 .60 060 .40 119 .20 240 EC106 Demand For Milano :  EC106 Demand For Milano Price Demand Curve $1 .80 .60 .40 .20 10 20 30 40 50 60 70 80 90 Quantity Supply Curve Ch 5 Outline:  Ch 5 Outline Deriving Market Demand Curve Price Elasticity of Demand Cross Price Elasticity of Demand Income Elasticity of Demand Price Elasticity of Supply So far OK, no backsliding Price Elasticity of Demand:  Price Elasticity of Demand Ed = Percentage Change in Quantity Demanded Percentage Change in Price Price Effect Output Effect Ford “Bet the Farm” on Ed :  Ford “Bet the Farm” on Ed Price Demand Curve Elastic $1000 800 600 400 10 20 30 40 50 60 70 80 90 Quantity Demand Curve Inelastic Outline:  Outline Price Elasticity of Demand (Ch 5) Price Ceilings (Ch 6) Price Floors Apps Not a Bad Agenda Drug Bust:  Drug Bust Price Quantity New Equilibrium Pe Qe Pe Perfectly Inelastic Demand:  Perfectly Inelastic Demand Perfectly Inelastic P $10 5 4 Q TR=$40 TR=$20 Price Effect Operating Deficit for NYC Subway:  Operating Deficit for NYC Subway Train Schedules and All Costs Have Been Incurred for 1999 Operation --$24.5 million When Price Lowered from $6 to $4 Still Deficit Your Job: Reduce Defict Operation Deficit: TR < TC:  Operation Deficit: TR < TC Area of Rectangle :  Area of Rectangle Length 10 A Area=Length x Width A = L x W 20 Width 200 = 20 X 10 Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 TR $24M Operating Deficit:  Operating Deficit TR - TC = $24M - $24.5M TR - TC = -$0.5M ..Hence the Operating Deficit Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 5 5 TR=$25M Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 TR=$24 Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 TR=$24M Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 TR=$25M Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 t Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 t $24M $25M $24M Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 t $24M $25M $24M When Price Falls… TR First Rises…. Then Falls... Price Elasticity of Demand:  Price Elasticity of Demand Ed = Percentage Change in Quantity Demanded Percentage Change in Price Price Effect Output Effect Slide31:  $10 Q P 8 6 3 1 2 4 10 TR $16 TR $24 Ed > 1, Demand Elastic Slide32:  $10 Q P 8 6 3 1 2 4 10 TR $16 Slide33:  $10 Q P 8 6 3 1 2 4 10 TR $16 TR $24 Ed > 1, Demand Elastic Lower Price, TR Rises Price Effect Output Effect Elasticity and Total Revenue:  Elasticity and Total Revenue ED > 1 then P P TR and and TR Slide35:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Slide36:  12 - 10 10 2 10 = % Change From 10 to 12 X 100 % X 100 = = 20% Price Elasticity of Coefficient:  Price Elasticity of Coefficient Ed = Percentage Change in Quantity Demanded Percentage Change in Price Looking at Top of Ed Formula:  Looking at Top of Ed Formula Percent Change in Quantity Demanded Qd = Qd X 100 Looking at Bottom of Ed Formula Percent Change in Price = P P X 100 Slide39:  Qd Qd X 100 P P X 100 Ed = Price Elasticity of Demand: Slide40:  Qd Qd P P Ed = Price Elasticity of Demand: Slide41:  $10 Q P 8 6 3 1 2 4 7 9 10 Slide42:  Qd Qd P P Ed = Price Elasticity of Demand: = (4 - 2) ? (6 - 8) ? Slide43:  $10 Q P 8 6 3 1 2 4 7 9 10 Which Is Base Point? Left point or Right Point? Slide44:  $10 Q P 8 6 3 1 2 3 4 7 9 10 7 Use Midpoint (Called Arc or Midpoint Formula)_ Slide45:  $10 Q P 8 6 3 1 2 4 7 9 10 Slide46:  Diff Q Ave Q Diff P Ave P Ed = Price Elasticity of Demand: = (4 - 2) (6 - 8) (6+8)/2 (4+2)/2 Slide47:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Slide48:  $10 Q P 8 6 3 1 2 4 7 9 10 Slide49:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: = (4 - 2) (6 - 8) (6+8)/2 (4+2)/2 Slide50:  Ed = Time for Calculator... (4 - 2) (6 - 8) 7 3 .667 -.286 = = 2.33 …finally, drop that MINUS Slide51:  $10 Q P 8 6 3 1 2 4 7 9 10 Slide52:  $10 Q P 8 6 3 1 2 4 7 9 10 TR = $21 Slide53:  $10 Q P 8 6 3 1 2 4 7 9 10 TR = $21 TR = $9 Slide54:  $10 Q P 8 6 3 1 2 4 7 9 10 TR = $21 TR = $9 Output Effect Price Effect Price Elasticity of Demand:  Price Elasticity of Demand Ed = Percentage Change in Quantity Demanded Percentage Change in Price Price Effect Output Effect Elasticity and Total Revenue:  Elasticity and Total Revenue ED < 1 then P P TR and and TR Linear Demand Curves Have Three Elasticity Ranges:  Linear Demand Curves Have Three Elasticity Ranges Ed > 1 (Demand Elastic), P falls, TR rises Ed = 1 (Demand Unit Elastic), P falls, TR stays same Ed < 1 (Demand Inelastic), P falls, TR falls Milano Cookie:  Milano Cookie A Pepperidge Farm Special EC106 Demand For Milano Cookies:  EC106 Demand For Milano Cookies Price/Cookie Quantity $2 .00 03 1.80 07 1.60 12 1.40 17 1.20 22 1.00 30 EC106 Demand For Milano :  EC106 Demand For Milano Price Demand Curve $2.00 1.80 1.60 1.40 1.20 1.00 5 10 15 20 25 30 Quantity Supply Curve EC106 Demand For Milano Cookies:  EC106 Demand For Milano Cookies Price/Cookie Quantity TR $2 .00 03 $6.00 1.80 07 12.60 1.60 12 19.20 1.40 17 23.80 1.20 22 26.40 1.00 30 30.00 Slide63:  $10 Q P 8 6 3 1 2 4 7 9 10 Slide64:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: = (9-7) (1-3) (1+3)/2 (9+7)/2 Slide65:  Diff Q Ave Q Diff P Ave P Ed = Price Elasticity of Demand: = (9-7) (1-3) 2 8 Slide66:  Diff Q Ave Q Diff P Ave P Ed = Price Elasticity of Demand: = (9-7) (1-3) 2 8 Slide67:  Ed = Time for Calculator... (2) (-2) 2 8 = .25 Slide68:  Qd Qd P P Ed = Time for Calculator... = .25 -1 = .250 - …finally, drop that MINUS Calculate Price Elasticity as Price Falls from $6 to $4 and Quantity Demanded Rises from 4 to 6:  Calculate Price Elasticity as Price Falls from $6 to $4 and Quantity Demanded Rises from 4 to 6 Slide70:  $10 Q P 8 6 3 1 2 4 7 9 10 2 8 Slide71:  $10 Q P 6 4 4 6 5 5 Ed>1 Price , TR Price Effect < Output Effect Slide72:  $10 Q P 6 4 4 6 5 5 Ed = 1 Price , TR Price Effect = Output Effect Slide73:  $10 Q P 6 4 4 6 5 5 Ed<1 P TR Price Effect > Output Effect Slide74:  $10 Q P 6 4 4 6 5 5 Ed>1 Price , TR Ed<1 Price , TR Linear Demand Curves Have Three Elasticity Ranges:  Linear Demand Curves Have Three Elasticity Ranges Ed > 1 (Demand Elastic), P falls, TR rises Ed = 1 (Demand Unit Elastic), P falls, TR stays same Ed < 1 (Demand Inelastic), P falls, TR falls Calculate Price Elasticity as Price Falls from $6 to $4 and Quantity Demanded Rises from 4 to 6:  Calculate Price Elasticity as Price Falls from $6 to $4 and Quantity Demanded Rises from 4 to 6 Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 TR=$25M Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 t $24M $25M $24M When Price Falls… TR First Rises…. Then Falls... Drug Bust:  Drug Bust Price Quantity New Equilibrium $100=Pe 60 100 Qe $300=Pe Demand For Subway:  Demand For Subway Price Per Day Pass $10 Millions of Riders Per Day 10 4 6 4 6 5 5 t $24M $25M $24M When Price Falls… TR First Rises…. Then Falls... Slide81:  $10 Q P Ed>1 Demand Elastic Slide82:  $10 Q P Ed<1 Demand Inelastic Ranges of Elasticity . . . (Figure 5-1):  Ranges of Elasticity . . . (Figure 5-1) Perfectly Inelastic Consumers are “extremely unresponsive” to price changes. Perfectly Elastic Consumers are “extremely responsive” to price changes. Unit Elastic Response is “equal to” change in price. Perfectly Inelastic Demand:  Perfectly Inelastic Demand Perfectly Inelastic P $10 5 4 Q Slide85:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Slide86:  Qd Qd P P Ed = Price Elasticity of Demand: = 0 Perfectly Elastic Demand:  Perfectly Elastic Demand Perfectly Elastic P $10 2 4 Q Slide88:  Qd Qd P P Ed = Price Elasticity of Demand: = oo Demand Elastic for Good When ::  Demand Elastic for Good When : Many Substitutes (e.g., Luxuries) Very Narrowly Defined Longer the Time Period Large Share of Budget Example: Demand for Gas During OPEC Energy Crisis 1973-74 By What % Does Qd change?:  By What % Does Qd change? Given: Ed = 2 Given: Price Rises 10% Ed = %Change Qd / % Change P 2 = x / 10% 2 x 10% = x 20% = x So Qd FALLS by 20% Color Code By What % Does Qd change?:  By What % Does Qd change? Given: Ed = 2 Given: Price Rises 10% Ed = %Change Qd / % Change P 2 = x / 10% 2 x 10% = x 20% = x So Qd FALLS by 20% Color Coded! Examine whether the supply or demand curve shifts.:  Examine whether the supply or demand curve shifts. SA DA Price Quantity $4.00 2000 Applications of Elasticity:  Applications of Elasticity “ Good News for Farming Bad News For Farmers?” University agronomists discover a more productive wheat variety Consider which direction the curve shifts.:  Consider which direction the curve shifts. SA DA Price Quantity $4.00 2000 SB Technology causes an increase in supply. Use Supply-and-Demand diagram to see how the market changes.:  Use Supply-and-Demand diagram to see how the market changes. SA DA Price Quantity $4.00 2000 SB 2400 $2.60 Compute Elasticity:  Compute Elasticity ED = (2400 - 2000) / (2200) ($2.60 - $4.00) / ($3.30) ED = 0.43 (Inelastic) Observe the Change in Total Revenue:  Observe the Change in Total Revenue SA DA Price Quantity $4.00 2000 SB 2400 $2.60 TRSA = $8,000 TRSB = $5,760! Slide98:  $10 Q P 6 4 4 6 Ed of Curved Line at Point Same as Straight Line Tangent to Curved Line at that Point Slide100:  $10 Qx Px 6 4 4 6 Py=$10 Py=$20 Substitutes X=Coke Y=Pepsi Cross Price Elasticity of Demand:  Cross Price Elasticity of Demand Cd = Percentage Change in Quantity Demanded of X Percentage Change in Price of Y Cross Price Effect Shift Effect Slide102:  $10 Qx Px 6 4 2 4 Py=$20 Py=$10 Complements X= Pizza Y= Beer Cross Price Elasticity:  Cross Price Elasticity Cd > 0 Substitutes Cd = 0 Unrelated Goods Cd < 0 Complements Cd Used in Antitrust Cases:  Cd Used in Antitrust Cases DuPont has 90% of Cellophane Market Antitrust Case initiated DuPont claims wax paper, tin foil substitutes for Cellophane Does Dupont hope that Cd > 0? What does Justice department hope that Cd equals? A Bar is a bar is a bar?:  A Bar is a bar is a bar? Are the taverns of Erie County, PA all substitutes for one another? What differentiates them: drinks sold bartenders customers darts/pool dancing/music Income Elasticity of Demand:  Income Elasticity of Demand Yd = Percentage Change in Quantity Demanded Percentage Change in Income Cross Price Effect Shift Effect Slide108:  $10 Qx Px 6 4 4 6 I=$50G I=$100G Normal Good Slide109:  $10 Qx Px 6 4 2 4 I=$100G I=$50G Inferior Good Income Elasticity:  Income Elasticity Yd > 0 Normal Yd < 1 Necessity Yd > 1 Luxury Yd = 0 Income Neutral Yd < 0 Inferior Example of Income Elasticity:  Example of Income Elasticity During a recession, the sales of which would be hurt most? Barber services Fast Food Restaurants Luxury Cars Salvation Army Stores Let’s See... Slide113:  $10 Q P 6 4 4 6 Elasticity of Supply Price Elasticity of Supply:  Price Elasticity of Supply Es = Percentage Change in Quantity Supplied Percentage Change in Price Slide115:  $10 Q P 6 4 4 6 10 Elasticity of Supply Elasticity of Supply:  Elasticity of Supply Es = oo Perfectly Elastic (Horizontal) Es > 1 Elastic (Flat Slope) Es = 1 Unit Elastic Es < 1 Inelastic (Steep Slope) Es = 0 Perfectly Inelastic (Vertical) Yd < 0 Inferior Slide117:  $10 Q P 6 4 4 6 Elasticity of Supply Es=1 Es<1 Es=0 Slide118:  $10 Q P 6 4 4 6 Elasticity of Supply Es=1 Es>1 Es=00 Quick Quiz!:  Quick Quiz! Define the price elasticity of demand. Explain the relationship between total revenue and elasticity of demand Supply Elastic for Good When ::  Supply Elastic for Good When : Longer the Time Period Example: Supply of Strawberries in Erie: This minute -This Hour - Today Price Elasticity of Supply:  Price Elasticity of Supply The percentage change in quantity supplied resulting from a one (1) percent change in price. Price Quantity A B Ranges of Elasticity:  Ranges of Elasticity Perfectly Elastic infinite Relatively Elastic >1 Unitary or Unit =1 Relatively Inelastic <1 Perfectly Inelastic = 0 Elasticity of Supply illustrated:  Elasticity of Supply illustrated Perfectly Inelastic Perfectly Elastic Determinants of Elasticity of Supply:  Determinants of Elasticity of Supply Flexibility or ability of sellers to change the amount of the good they produce. Beachfront land verses books, cars, manufactured goods, etc. More elastic in the long run. Computing Elasticity Coefficient:  Computing Elasticity Coefficient Computed as the percentage change in the quantity supplied divided by the percentage change in price. Elasticity of Supply = Percentage Change in Quantity Supplied Percentage Change in Price Quick Quiz!:  Quick Quiz! Define the elasticity of supply. Explain why the price elasticity of supply might be different in the long run than in the short run. Apply Comparative Statics (Chapter 4):  Apply Comparative Statics (Chapter 4) Does supply or demand shifts? Shift Left or Right? Do Pe and Qe change? This chapter is going slowly! Thank God it’s about to end!!!! Yes it will end! Conclusion:  Conclusion Elasticity is defined as. . . Price Elasticity of demand is. . . Income Elasticity of demand is. . . Price Elasticity of supply is. . . What are the relationships between elasticity and total revenue or total consumer expenses? That’s All on Elasticity for Today!!!:  That’s All on Elasticity for Today!!! Slide130:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Simplified Slide131:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Business Traveler = (1900-2000) ($250-$200) ($250+$200)/2 (1900+2000)/2 Slide132:  Ed Time for Calculator... = (-100) ($50) $225 1950 -.051 .222 = Ed = 0.23 = Inelastic …finally, drop that MINUS Slide133:  $10 Q P 6 4 4 6 5 5 Ed<1 P TR Price Effect > Output Effect Total Revenue Before & After:  Total Revenue Before & After Initially, TR = 2000 x $200 = $400,000 After, TR = 1900 x $250 = $475,000 When P rose, TR rose Demand Inelastic! Slide135:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Simplidied Slide136:  Difference in Q Average Q Difference in P Average P Ed = Price Elasticity of Demand: Vacationer = (600-800) ($250-$200) ($250+$200)/2 (600+800)/2 Slide137:  Ed Time for Calculator... = (-200) ($50) $225 700 -.285 .222 = Ed = 1.28 = Inelastic …finally, drop that MINUS Slide138:  $10 Q P 6 4 4 6 5 5 Ed>1 Price , TR Price Effect < Output Effect Total Revenue Before & After:  Total Revenue Before & After Initially, TR = 800 x $200 = $160,000 After, TR = 600 x $250 = $150,000 When P rose, TR fell Demand Elastic! Ya don’t say! Slide140:  Difference in Q Average Q Difference in P Average P Ed = Elasticity of Demand: Income=$10,000 = (-8) ($2) ($9) (36) =1.00 Slide141:  Difference in Q Average Q Difference in P Average P Ed = Elasticity of Demand: Income=$12,000 = (-5) ($2) ($9) (47.5) =0.47 Slide142:  Difference in Q Average Q Difference in Income Average of Income Yd = Income Elasticity: Price = $12 = (6) ($2,000) ($11,000) (27) =1.22 Slide143:  $10 Q P $12 4 24 30 I=$10G I=$12G Normal Good Slide144:  Difference in Q Average Q Difference in Income Average of Income Yd = Income Elasticity: Price = $16 = (4) ($2,000) ($11,000) (10) =2.20 That’s All on Elasticity for Today!!!:  That’s All on Elasticity for Today!!! AN IN-CLASS EXERCISE:  AN IN-CLASS EXERCISE Did elasticity group exercise today Ch 5 Problem 3: Worked Okay Develop this in future! Fairly positive reception

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