Transcript Document

Welcome to Unit 4
The Market Strikes Back & Elasticity
The music is from Willie Nelson’s
album, “Super Hits” (1994)
Please enjoy
Consumers of coffee beans - DEMAND
High
Price
D1
$
Low
Price
D1
0
Very
Few
Q
Many
Many
Slide 2
Demand curve SHIFTED to the RIGHT because
MORE are demanded at EVERY price Why would curve shift right?
D1
1.
2.
3.
4.
5.
D2
High - $ 9
Price - $ 8
$
-$7
-$6
-$5
-$4
Low - $ 3
Price - $2
- $1
0
1 2
| |
Very
Few
MORE consumers
Increased INCOME
More TASTE for this item
Changed EXPECTATIONS
Increase in price of the
SUBSTITUTE product
D1
3
|
4
|
5
|
6
|
Q
7 8
| |
D2
9 10 11
| Many
| |
Many
Slide 3
SUPPLIERS of coffee beans
S1
High - $ 9
Price - $ 8
$
-$7
-$6
-$5
-$4
Low - $ 3
Price - $2
- $1
0
S11
2
| |
Very
Few
3
|
4
|
5
|
6
|
Q
7 8
| |
9 10 11
| Many
| |
Many
Slide 4
Supply curve SHIFTED to the RIGHT because
MORE are SUPPLIED at EVERY price
S1
$
-- $11
-- $10
High - $ 9
Price - $ 8
-$7
-$6
-$5
-$4
Low - $ 3
Price - $2
- $1
0
1 2
| |
Very
Few
S2
3
|
4
|
5
|
6
|
Q
7 8
| |
Why would curve shift RIGHT ?
1. More SUPPLIERS
2. Decreased INPUT prices
3. Improved TECHNOLOGY
4. Changed EXPECTATIONS
5. Decrease in price of the
RELATED product
(gasoline and heating oil)
9 10 11
| Many
| |
Many
Slide 5
D1
S1
High - $ 9
Price - $ 8
$
-$7
-$6
-$5
-$4
Low - $ 3
Price - $2
- $1
S
0 1 1 2 3
| | |
Very
Few
4
|
5
|
6
|
Q
7 8
| |
9 10 11
| Many
| |
D1
Many
Slide 6
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Slide 10
Unit 4
The Market Strikes Back
Slide 11
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Slide 43
Unit 4
Elasticity
Slide 44
Problem:
You are in charge of pricing.
Your company is now charging $10 per unit
And it sells 1,000 units, for a revenue of $10,000.
Your boss wants you to generate more revenue.
Do you
INCREASE the price,
or lower the price?
Slide 45
High Price
D1
Low Price
0
D1
Very
Few
Many
Many
Slide 46
High Price
D1
Low Price
0
Very
Few
D1
Many
Many
Slide 47
High Price
D1
D1
Low Price
0
Very
Few
Many
Many
Slide 48
High Price
D1
Low Price
0
D1
Very
Few
Many
Many
Slide 49
High Price
D1
Low Price
0
D1
Very
Few
Many
Many
Slide 50
High Price
D1
Low Price
0
D1
Very
Few
Many
Many
Slide 51
High Price
D1
Low Price
0
D1
Very
Few
Many
Many
Slide 52
High Price
D1
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
D1
Very
Few
1,000
Many
Many
Slide 53
High Price
D1
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
D1
Very
Few
1,000
Many
Many
Slide 54
High Price
D1
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
D1
Very
Few
909
1,000
Many
Many
Slide 55
High Price
D1
909 * $ 11 = TR of $10,000
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
D1
Very
Few
909
1,000
Many
Many
Slide 56
High Price
Dpe1
909 * $ 11 = TR of $10,000
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
Dpe1
Very
Few
909
1,000
Many
Many
Slide 57
High Price
Percent change in quantity demanded
Dpe1
---------------------------------------------------= price elasticity
Percent change in price
909 * $ 11 = TR of $10,000
$ 11
909-1000
- 91
1,000 * $ 10 = TR of $10,000
$ 10
-------------------- .09
1000
1000
-------------- = ------------ = ---- = -.9 = price elasticity
11
10
1
(almost 1)
Low–Price
Dpe1
-------------.10
0
10
Very 10 909
Many
Few
1,000
Many
Slide 58
High Price
D1
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
Very
Few
1,000
D1
Many
Many
Slide 59
High Price
D1
975 * $ 11 = TR of $10,725
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
Very
Few
975
1,000
D1
Many
Many
Slide 60
High Price
Dpe<1
975 * $ 11 = TR of $10,725
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Low Price
0
Very
Few
975
1,000
Dpe<1
Many
Many
Slide 61
High Price
D1
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
D1
Low Price
0
Very
Few
1,000
Many
Many
Slide 62
High Price
D1
$ 11
850 * $ 11 = TR of $9,350
1,000 * $ 10 = TR of $10,000
$ 10
D1
Low Price
0
Very
850
Few
1,000
Many
Many
Slide 63
High Price
Dpe>1
850 * $ 11 = TR of $9,350
$ 11
1,000 * $ 10 = TR of $10,000
$ 10
Dpe>1
Low Price
0
Very
850
Few
1,000
Many
Many
Slide 64
High Price
Dpe<1 Dpe0
Dpe1
Dpe>1
Dpe∞
Dpe∞
Dpe>1
Dpe1
Low Price
0
Very
Few
Dpe0
Dpe<1
Many
Many
Slide 65
High Price
Dpe0
Perfectly
Inelastic
demand
Low Price
0
Very
Few
Dpe0
Many
Many
Slide 66
High Price
Dpe∞
Perfectly
elastic
demand
Dpe∞
Low Price
0
Very
Few
Many
Many
Slide 67
Problem:
You are in charge of pricing.
Your company is now charging $10 per unit
And it sells 1,000 units, for a revenue of $10,000.
Your boss wants you to generate more revenue.
Do you
INCREASE the price,
or lower the price?
Slide 68
Do a series of pricing experiments
Measure sales at starting price
Change price by given amount in a test location
Measure change in demand
Change price again by a different amount
Measure new change in demand
Compare numbers and compute price elasticity of
demand.
Use computed Dpe to compute optimum price.
Slide 69
Other Elasticity subjects:
-Income elasticity of demand
-Normal good versus an inferior good
(Big Mac vs T-bone steak)
-Complimentary goods (coffee & donuts)
-Cross price elasticity (coffee & tea)
-Price elasticity of SUPPLY
Slide 70
This week’s
Discussion Topic
Slide 71
This week’s Assignment
Slide 72
This week’s Assignment
Consumer surplus Supplier’s surplus Deadweight loss
Supplier’s surplus transferred from consumers
Slide 73
This week’s Assignment
Income elasticity of demand
calculation, using midpoint
method
Consumer surplus Supplier’s surplus Deadweight loss
Supplier’s surplus transferred from consumers
Slide 74
This week’s Assignment
Income elasticity of demand
calculation, using midpoint
method
Consumer surplus Supplier’s surplus Deadweight loss
Supplier’s surplus transferred from consumers
+ the outline for your research paper
Slide 75
Slide 76
Things that it may be helpful to remember
when you get to the end of the course
Slide 77
Things that it may be helpful to remember
when you get to the end of the course
A price floor or a price ceiling is an example of:
a price control.
Slide 78
Things that it may be helpful to remember
when you get to the end of the course
The minimum wage, which sets a lower limit
on the wages that workers can earn, is often
above the equilibrium price. The minimum
wage is an example of:
a price floor.
Slide 79
Things that it may be helpful to remember
when you get to the end of the course
Government intervention in the form of
price floors or price ceilings will:
result in either surpluses or shortages.
Slide 80
Things that it may be helpful to remember
when you get to the end of the course
An effective price ceiling will most likely
result in which of the following?
an increase in consumer surplus .
Slide 81
Things that it may be helpful to remember
when you get to the end of the course
Price ceilings may be imposed if
demanders can make strong moral or
political arguments for lower prices.
Slide 82
Things that it may be helpful to remember
when you get to the end of the course
When a price ceiling is imposed, this results in:
inefficiency due to overconsumption of the
good
Slide 83
Things that it may be helpful to remember
when you get to the end of the course
Inefficient allocations of goods to consumers
often result from:
price ceilings.
Slide 84
Things that it may be helpful to remember
when you get to the end of the course
A price ceiling on a good often results in:
black market or underground transactions of
the good.
Slide 85
Things that it may be helpful to remember
when you get to the end of the course
A rent control scheme that would set a
maximum amount of rent paid that is below
the equilibrium rental price would most
likely be supported by which of the
following groups?
people who wish to rent such an apartment
Slide 86
Things that it may be helpful to remember
when you get to the end of the course
In the rental housing market, landlords
determine the number of units rented. If a
price control is present in the market, this
control must be a:
price ceiling.
Slide 87
Things that it may be helpful to remember
when you get to the end of the course
An increase in producer surplus would occur if:
an effective price floor was imposed.
Slide 88
Things that it may be helpful to remember
when you get to the end of the course
Government may choose to impose a price
floor if:
suppliers can make strong moral or political
arguments for higher prices.
Slide 89
Things that it may be helpful to remember
when you get to the end of the course
An effective price floor would result in
a surplus of the good.
Slide 90
Things that it may be helpful to remember
when you get to the end of the course
If wages are set above the equilibrium wage
in the market, then the number of workers
hired will depend upon:
employers.
Slide 91
Things that it may be helpful to remember
when you get to the end of the course
An effective minimum wage ultimately
means that:
employees must demonstrate that they
have characteristics greater than other
potential employees even if they are willing
to work at a lower wage.
Slide 92
Things that it may be helpful to remember
when you get to the end of the course
An effective price floor will lead to:
a resulting excess supply or a surplus.
Slide 93
Things that it may be helpful to remember
when you get to the end of the course
A quota is essentially a:
quantity restriction.
Slide 94
Things that it may be helpful to remember
when you get to the end of the course
If government decides to control the
amount of a good allowed into a market,
this effectively will:
increase incentives for market participants
to engage in illegal or black market
activities.
Slide 95
Things that it may be helpful to remember
when you get to the end of the course
Which of the following statements is true?
I.
Quantity controls drive a wedge between the demand
price and the supply price of the good.
II. The difference between the demand and supply price
at the quota limit is referred to as consumer surplus.
III. Quantity controls have no undesirable side effects.
Statement I is true.
Slide 96
Things that it may be helpful to remember
when you get to the end of the course
Quotas often:
lead to deadweight losses resulting from a
wedge between the price of sellers and that
of demanders.
Slide 97
Things that it may be helpful to remember
when you get to the end of the course
The price elasticity of demand measures the
responsiveness of the change in:
quantity demanded to a change in price.
Slide 98
Things that it may be helpful to remember
when you get to the end of the course
The price elasticity of demand is computed
as the percentage change in:
quantity demanded divided by the
percentage change in price.
Slide 99
Things that it may be helpful to remember
when you get to the end of the course
If demand is elastic, then:
the quantity effect dominates the price
effect, and a decrease in price causes total
revenue to rise.
Slide 100
Things that it may be helpful to remember
when you get to the end of the course
When the absolute value of the percentage
change in quantity demanded is less than
the absolute value of the percentage change
in price, demand is:
inelastic.
Slide 101
Things that it may be helpful to remember
when you get to the end of the course
Suppose price is initially $20, but then
decreases to $15. The absolute value of the
percentage change in price (using the
midpoint method) is:
28%.
Slide 102
Things that it may be helpful to remember
when you get to the end of the course
If you wanted to make sure that your
calculation of elasticity was consistent
regardless of your initial point, you would
use:
the midpoint formula calculation of
elasticity.
Slide 103
Things that it may be helpful to remember
when you get to the end of the course
A demand curve that is perfectly inelastic is:
vertical.
Slide 104
Things that it may be helpful to remember
when you get to the end of the course
If the price elasticity of demand between
two points on a demand curve is 0.75, then
demand between those two points is:
price-inelastic.
Slide 105
Things that it may be helpful to remember
when you get to the end of the course
If the price elasticity of demand equals 0,
then this means the demand curve is:
vertical.
Slide 106
Things that it may be helpful to remember
when you get to the end of the course
If the absolute value of the price elasticity of
demand is greater than 1, this means:
small percentage changes in price will lead
to much larger changes in the percentage
change in quantity demanded.
Slide 107
Things that it may be helpful to remember
when you get to the end of the course
All of the following are characteristics of an
elastic demand except:
short time periods of adjustment.
Slide 108
Things that it may be helpful to remember
when you get to the end of the course
The price of a gallon of gasoline increases
10% this year. As a result, which of the
following events is most likely to occur?
Gasoline expenditures will increase if
gasoline is an inelastic good.
Slide 109
Things that it may be helpful to remember
when you get to the end of the course
Goods A and B have a positive cross-price
elasticity of demand. This means Goods A
and B are:
substitutes.
Slide 110
Things that it may be helpful to remember
when you get to the end of the course
Suppose the cross-price elasticity between
two goods is 1.5. If the price of one good
increases by 10%, then the quantity
demanded of the other good will:
increase by 15%.
Slide 111
Things that it may be helpful to remember
when you get to the end of the course
Jessica experienced an increase in her income by
10% this year. In the same year, Jessica's quantity
demanded of milk increased by 10% and her
quantity demanded for bread increased by 5%.
This means that for Jessica:
both milk and bread are normal goods
Slide 112
Things that it may be helpful to remember
when you get to the end of the course
The price of coffee increases by 10%, and as
a result, Alex purchases less donuts. This
suggests that to Alex, coffee and donuts are:
complements.
Slide 113
Things that it may be helpful to remember
when you get to the end of the course
If the percentage change in the quantity
demanded of a good is greater than the
percentage change in income, then this
good will have an income elasticity:
greater than 1 and it is a normal good.
Slide 114
Things that it may be helpful to remember
when you get to the end of the course
One would expect to see supply become
more price ________ as harvest season
approaches and crops are being brought in
from the fields.
-elastic
Slide 115
Things that it may be helpful to remember
when you get to the end of the course
Tomas produces 100 units of Good Y when
the price is $5 and 150 units of Good Y when
the price is $7. What is the value of Tomas's
price elasticity of supply?
1.2
Slide 116
Things that it may be helpful to remember
when you get to the end of the course
Decreases in input costs and the longer the
length of time since a price change will tend
to:
increase the price elasticity of supply.
Slide 117