price elasticity of demand; cross-price elasticity of demand; income elasticity of demand; price elasticity of supply.

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "price elasticity of demand; cross-price elasticity of demand; income elasticity of demand; price elasticity of supply."

Transcription

1 Unit 3: Elasticity

2 In accorance with the APT rogramme the objective of the lecture is to hel You to comrehen an aly the concets of elasticity, incluing calculating: rice elasticity of eman; cross-rice elasticity of eman; income elasticity of eman; rice elasticity of suly.

3 Require reaing Mankiw, N.G. Princiles of Microeconomics. 6th eition. South-Western Chater 5. Elasticity an Its Alication. Begg, D., R.Dornbusch, S.Fischer. Economics. 8th eition. McGraw Hill Chater 4. Elasticities of eman an suly.

4 Questions to be revise Deman scheule an the law of eman; Factors of eman, comlements an substitutes; Suly scheule an the law of suly; Market equilibrium: welfare asects of government controls.

5 Price Elasticity of Deman Percentage change in quantity emane that results from one ercent change in rice:

6 Price Elasticity of Deman Price elasticity may be efine with resect to infinitesimal changes in rice:

7 Elasticity an Sloe of a Deman Curve Equal elasticities an ifferent sloes

8 Elasticity an Sloe of a Deman Curve Different elasticities an equal sloes

9 Elasticity an Sloe of a Deman Curve Consier an arbitrary function: y=f(x) Elasticity is a imension free measure of change:

10 Elastic an Inelastic Deman Elastic: 1 Unit - elastic: 1 Inelastic: 1

11 Unit tax: examle (APT 2009) (a) Calculate the roucer surlus before tax. (b) Now assume a er-unit tax of $2 is imose whose imact is shown in the grah above. i. Calculate the amount of tax revenue ii. What is the after-tax rice that the sellers now kee? iii.calculate the roucer surlus after tax. (c) Is the eman elastic, inelastic, or unit elastic between the rices of $5 an $6. Exlain.

12 Price elasticity of eman: examle (APT 2010) The table below gives the quantity of goo X emane an sulie at various rices. Price (ollars) Quantity Demane (units) Quantity Sulie (units) (i) Is the eman for goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain.

13 Total Revenue an Marginal Revenue Total Revenue = Total Exeniture = P(Q)Q Marginal Revenue: Marginal Revenue with infinitesimal changes in quantity of the goo:

14 Price Elasticity of Deman, Total an Marginal Revenue If, Total revenue is an increasing function of quantity of the goo: when Q goes u, TR grows as well; when Q goes own, TR also eclines.

15 Price Elasticity of Deman, Total an Marginal Revenue If, Total revenue is a ecreasing function of quantity of the goo: when Q goes u, TR eclines; when Q goes own, TR grows.

16 Price Elasticity of Deman, Total an Marginal Revenue If, Total revenue is at the maximum.

17 TR Elasticity of linear eman an revenues of roucers: variations of sales TR rice-elastic eman rice-inelastic eman E E P, MR 0 E E 1 E 0 a Q MR D 0 a/2b a/b Q

18 Elasticity of linear eman an revenues of roucers: variations of sales P a E E 1 rice-elastic eman MR D E E 0 rice-inelastic eman E 0 a/2b a/b Q E E TR E 1 q

19 Price Elasticity of Deman an Total Exeniture Total Exeniture = Revenue = P Q(P).

20 Price Elasticity of Deman an Total Exeniture (cont ) Total exeniture is highest when 1. If eman is Elastic: 1 Inelastic: 1 A rice increase will reuce total exeniture increase total exeniture A rice reuction will increase total exeniture reuce total exeniture

21 Elasticity of linear eman an revenues of roucers: variations of rice P a E E 1 E 1 rice-elastic eman E 1 TR 1 0 E a/2 0 E 1 a/2b 1 E 0rice-inelastic eman E 0 a/b Q

22 Elasticity of linear eman scheule an revenues of roucers: grahical exosition P E a E 1 E 1 rice-elastic eman E 1 TR 1 0 E a/2 0 E 1 a/2b 1 E 0rice-inelastic eman E 0 a/b Q E E TR E 1

23 Cross-Price Elasticity of Deman Cross-rice elasticity of eman the ercentage by which quantity emane of the first goo changes in resonse to a 1 ercent change in the rice of the secon. Substitutes >0, Comlements <0 Markets for substitutes P x P y D y S y E 1 E Q x Q y

24 Cross-Price Elasticity of Deman Cross-rice elasticity of eman the ercentage by which quantity emane of the first goo changes in resonse to a 1 ercent change in the rice of the secon. Substitutes >0, Comlements <0 Markets for comlementary goos P x P y D y S y E 0 E Q x Q y

25 Cross-rice elasticity of eman: examle (APT 2009) Assume that the cross-rice elasticity of eman between eanuts an bananas is ositive. A wiesrea ecease has estroye the banana cro. What will haen to the equilibrium rice an quantity of eanuts in the short run? Exlain.

26 Income Elasticity of Deman Income elasticity of eman the ercentage by which quantity emane of the first goo changes in resonse to a 1 ercent change in income. Normal goos: E I >0; inferior goos: E I <0.

27 Income elasticity of eman: examle (APT 2010) Assume that the income elasticity of eman for goo Y is -2. Using a correctly labele grah of the market for goo Y, show the effect of a significant increase in income on the equilibrium rice of goo Y in the short run.

28 Price Elasticity of Suly - the ercentage change in quantity sulie that occurs in resonse to a 1 ercent change in rice. Q P P Q Always ositive..

29 Determinants of Price Elasticity of Suly - Flexibility an mobility of inuts; - Ability to rouce substitute inuts; - Time: short-run vs. long-run.

30 Price elasticity of eman an suly : examle (APT 2010) The table below gives the quantity of goo X emane an sulie at various rices. Price (ollars) Quantity Demane (units) Quantity Sulie (units) (i) Is the eman for goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain. (ii) Is the suly of goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain.

31 Elasticity of suly an eman an tax buren of consumers an roucers Incience of a tax escribes who eventually bears the buren of it. Let s calculate tax buren of consumers an roucers to rove that it eens on the relative elasticities of eman an suly: where T c is the tax buren of consumers, T tax buren of roucers, T is the total tax revenue of the government

32 Elasticity of suly an eman an tax buren of consumers an roucers Use the exressions of elasticities of eman an suly to get: The relative tax buren of consumers an roucers is the inverse ratio of absolute values of corresoning elasticities, i.e. to the negative of the ratio of elasticities of suly an eman.

33 Elasticity of suly an eman an tax buren of consumers an roucers The more elastic eman an the less elastic suly curves are the greater is the share of the tax levie on roucers as comare to that of consumers:

34 Tax incience an rice elasticity of eman an suly : examle (APT 2010) The table below gives the quantity of goo X emane an sulie at various rices. Price (ollars) Quantity Demane (units) Quantity Sulie (units) (i) Is the eman for goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain. (ii) Is the suly of goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain. (iii)if a er-unit tax is imose on goo X, how is the buren of the tax istribute between the buyers an sellers of goo X?

35 Tax incience an rice elasticity of eman: examle (APT 2008) Assume that consumers always buy 20 units of goo R each month regarless of its rice. (i) What is the numerical value of the rice elasticity of eman for goo R? (ii) If the government imlements a er-unit tax of $2 on goo R, how much of the tax will the seller ay?

Unit 3. Elasticity Learning objectives Questions for revision: 3.1. Price elasticity of demand

Unit 3. Elasticity Learning objectives Questions for revision: 3.1. Price elasticity of demand Unit 3. Elasticity Learning objectives To comrehen an aly the concets of elasticity, incluing calculating: rice elasticity of eman; cross-rice elasticity of eman; income elasticity of eman; rice elasticity

More information

Price Elasticity of Demand

Price Elasticity of Demand rice Elasticity of Demand Demand A B The percentage change in the quantity demanded given...... a one percent change in the price. rinciples of Microeconomics & rinciples of Macroeconomics: Ch. 5 First

More information

Chapter Three. Topics To Be Covered

Chapter Three. Topics To Be Covered Chater Three Alying the Sulyand-Demand Model Toics To Be Covered How the shaes of demand and suly curves matter? Sensitivity of quantity demanded to rice. Sensitivity of quantity sulied to rice. Long run

More information

Price Elasticity of Demand MATH 104 and MATH 184 Mark Mac Lean (with assistance from Patrick Chan) 2011W

Price Elasticity of Demand MATH 104 and MATH 184 Mark Mac Lean (with assistance from Patrick Chan) 2011W Price Elasticity of Demand MATH 104 and MATH 184 Mark Mac Lean (with assistance from Patrick Chan) 2011W The rice elasticity of demand (which is often shortened to demand elasticity) is defined to be the

More information

Chapter 4: Elasticity

Chapter 4: Elasticity Chapter : Elasticity Elasticity of eman: It measures the responsiveness of quantity emane (or eman) with respect to changes in its own price (or income or the price of some other commoity). Why is Elasticity

More information

Chapter 9 Profit Maximization

Chapter 9 Profit Maximization Chater 9 Profit Maximization Economic theory normally uses the rofit maximization assumtion in studying the firm just as it uses the utility maximization assumtion for the individual consumer. This aroach

More information

Elasticity. Price elasticity of demand

Elasticity. Price elasticity of demand lasticity Why cheap beer gives you gonorrhea, and other stories rice elasticity of demand The price elasticity of demand of a good measures the responsiveness of the quantity demanded of the good to changes

More information

A scenario. Elasticity. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity and its Application

A scenario. Elasticity. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity and its Application 5 Elasticity and its Application R I N C I L E O F ECONOMIC F O U R T H E I T I O N N. G R E G O R Y M A N K I W remium oweroint lides by Ron Cronovich 2008 update Modified by Joseph Tao-yi Wang 2008 outh-western,

More information

Chapter 4. Elasticity

Chapter 4. Elasticity Chapter 4 Elasticity -comparative static exercises in the supply and demand model give us the direction of changes in equilibrium prices and quantities -sometimes we want to know more we want to know about

More information

Chapter 6. Elasticity: The Responsiveness of Demand and Supply

Chapter 6. Elasticity: The Responsiveness of Demand and Supply Chapter 6. Elasticity: The Responsiveness of Demand and Supply Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 202 504 Principles of Microeconomics Elasticity Demand curve:

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly In accordance with the APT programme objectives of the lecture are to help You to: identify and examine the sources of monopoly power; understand the

More information

c 2009 Je rey A. Miron 3. Examples: Linear Demand Curves and Monopoly

c 2009 Je rey A. Miron 3. Examples: Linear Demand Curves and Monopoly Lecture 0: Monooly. c 009 Je rey A. Miron Outline. Introduction. Maximizing Pro ts. Examles: Linear Demand Curves and Monooly. The Ine ciency of Monooly. The Deadweight Loss of Monooly. Price Discrimination.

More information

PROBLEM SET#3 PART I: MULTIPLE CHOICE

PROBLEM SET#3 PART I: MULTIPLE CHOICE 1 PROBLEM SET#3 PART I: MULTIPLE CHOICE 1. In general, elasticity is a measure of a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive.

More information

Prof. Dr. Thomas Straubhaar. Wintersemester 2009/10 VORLESUNG. -VWL 1 - (Principles of Economics)

Prof. Dr. Thomas Straubhaar. Wintersemester 2009/10 VORLESUNG. -VWL 1 - (Principles of Economics) Universität Hamburg Prof. Dr. Thomas Straubhaar Wintersemester 009/0 VORLESUNG (-0.90) 0 90) Einführung in die Volkswirtschaftslehre -VWL - (Princiles of Economics) MODUL : Demand Alle Zuschauer der. Bundesliga

More information

ELASTICITY AND ITS APPLICATION

ELASTICITY AND ITS APPLICATION 5 ELASTICITY AND ITS APPLICATION CHAPTER OUTLINE: I. The Elasticity of Demand A. Definition of elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.

More information

Class 4: Monopoly and Market Power. Power to affect market price or the ability to set price above marginal cost Monopoly power and monopsony power

Class 4: Monopoly and Market Power. Power to affect market price or the ability to set price above marginal cost Monopoly power and monopsony power Class 4: Monooly and Market Power. Market ower Power to affect market rice or the ability to set rice above marginal cost Monooly ower and monosony ower An examle of monosony ower: The big-3 and their

More information

2 Price Elasticity of Demand

2 Price Elasticity of Demand 1 1.1 Goals of this class Goals of this class Expand on supply and demand: how much do quantities change in responses to: changes in price? changes in income? changes in price of related goods? Learn implications

More information

Two aspects of an elasticity are important: (1) whether it positive or negative and (2) whether it is greater than 1 or less than 1 in absolute value

Two aspects of an elasticity are important: (1) whether it positive or negative and (2) whether it is greater than 1 or less than 1 in absolute value Overview I. The Elasticity Concept - Own Price Elasticity - Elasticity and Total Revenue - Cross-Price Elasticity - Income Elasticity II. Demand Functions - Linear - Log-Linear II. Regression Analysis

More information

Market Definition, Elasticities and Surpluses

Market Definition, Elasticities and Surpluses Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology rofessors Berndt, Chapman, Doyle, and Stoker RECITATION NOTES #1 Market Definition, Elasticities and Surpluses Friday - September

More information

2007 Thomson South-Western

2007 Thomson South-Western Elasticity... allows us to analyze supply and demand with greater precision. is a measure of how much buyers and sellers respond to changes in market conditions THE ELASTICITY OF DEMAND The price elasticity

More information

Elasticities of Demand

Elasticities of Demand rice Elasticity of Demand 4.0 rinciples of Microeconomics, Fall 007 Chia-Hui Chen September 0, 007 Lecture 3 Elasticities of Demand Elasticity. Elasticity measures how one variable responds to a change

More information

Microeconomics: Market Shocks & Producer/Consumer Surplus

Microeconomics: Market Shocks & Producer/Consumer Surplus HO 2207 (Economics) Learning Centre Microeconomics: Market hocks & roducer/consumer urplus hocks to supply and demand in a market equilibrium situation were discussed in the upply & emand worksheet. In

More information

a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price elastic

a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price elastic Things to know about elasticity. 1. Price elasticity of demand a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price

More information

MFP SET. Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 2000 1

MFP SET. Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 2000 1 MFP SET Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 1 Consumer surplus! Willingness to pay: the maximum amount that a consumer will pay for a good! Consumer surplus: the

More information

A graphical introduction to the budget constraint and utility maximization

A graphical introduction to the budget constraint and utility maximization EC 35: ntermediate Microeconomics, Lecture 4 Economics 35: ntermediate Microeconomics Notes and Assignment Chater 4: tilit Maimization and Choice This chater discusses how consumers make consumtion decisions

More information

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

Module 2 Lecture 5 Topics

Module 2 Lecture 5 Topics Module 2 Lecture 5 Topics 2.13 Recap of Relevant Concepts 2.13.1 Social Welfare 2.13.2 Demand Curves 2.14 Elasticity of Demand 2.14.1 Perfectly Inelastic 2.14.2 Perfectly Elastic 2.15 Production & Cost

More information

Chapter 4: Elasticity. McTaggart, Findlay, Parkin: Microeconomics 2007 Pearson Education Australia

Chapter 4: Elasticity. McTaggart, Findlay, Parkin: Microeconomics 2007 Pearson Education Australia Chapter 4: Elasticity Objectives After studying this chapter, you will be able to: Define, calculate, and explain the factors that influence the price elasticity of demand Define, calculate, and explain

More information

Jacob: If there is a tax, there is a dead weight loss; why do we speak of a social gain?

Jacob: If there is a tax, there is a dead weight loss; why do we speak of a social gain? Microeconomics, sales taxes, final exam practice problems (The attached PDF file has better formatting.) *Question 1.1: Social Gain Suppose the government levies a sales tax on a good. With the sales tax,

More information

Elasticity and Its Application

Elasticity and Its Application Elasticity and Its Application Chapter 5 All rights reserved. Copyright 2001 by Harcourt, Inc. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

More information

There are two different ways you can interpret the information given in a demand curve.

There are two different ways you can interpret the information given in a demand curve. Econ 500 Microeconomic Review Deman What these notes hope to o is to o a quick review of supply, eman, an equilibrium, with an emphasis on a more quantifiable approach. Deman Curve (Big icture) The whole

More information

Practice Questions Week 3 Day 1

Practice Questions Week 3 Day 1 Practice Questions Week 3 Day 1 Figure 4-1 Quantity Demanded $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8 Price Per Pair Quantity Supplied 1. Figure 4-1 shows the supply and demand for socks. If a price

More information

Basic idea. Chapter 3: Elasticity. but how much? I. Price Elasticity of Demand. % change in Qd. equation. Qs holding other factors constant

Basic idea. Chapter 3: Elasticity. but how much? I. Price Elasticity of Demand. % change in Qd. equation. Qs holding other factors constant Chapter 3: Elasticity rice elasticity demand supply Cross elasticity Income elasticity Basic idea We know when d s holding other factors constant but how much? if price doubles how much does d fall? by

More information

Elasticity. Definition of the Price Elasticity of Demand: Formula for Elasticity: Types of Elasticity:

Elasticity. Definition of the Price Elasticity of Demand: Formula for Elasticity: Types of Elasticity: Elasticity efinition of the Elasticity of emand: The law of demand states that the quantity demanded of a good will vary inversely with the price of the good during a given time period, but it does not

More information

Willingness to Pay for a Risk Reduction

Willingness to Pay for a Risk Reduction The Economics of Climate Change C 75 Willingness to Pay for a Risk Reuction Sring 0 C Berkeley Traeger 5 Risk an ncertainty The Economics of Climate Change C 75 Back to Risk We will mostly treat the category

More information

3. CONCEPT OF ELASTICITY

3. CONCEPT OF ELASTICITY 3. CONCET OF ELASTICIT The quantity demanded of a good is affected mainly by - changes in the price of a good, - changes in price of other goods, - changes in income and c - changes in other relevant factors.

More information

Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy

Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 2900111 (Section 1) Chairat Aemkulwat Economics I: Microeconomics Spring 2015 Solution to Selected Questions: CHAPTER

More information

SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

More information

Monopoly vs. Compe22on. Theory of the Firm. Causes of Monopoly. Monopoly vs. Compe22on. Monopolis2c Markets P. Natural. Legal.

Monopoly vs. Compe22on. Theory of the Firm. Causes of Monopoly. Monopoly vs. Compe22on. Monopolis2c Markets P. Natural. Legal. Monooly vs. Comeon Monooly Perfect Come,,on Theory of the Firm P Monooly s demand = Market demand (ΔQ P) P Firm s demand = Horizontal line ( Δ P does not change) Monoolisc Markets P d Q Monooly vs. Comeon

More information

SAMPLE FINAL. Part I - Multiple Choice Questions:

SAMPLE FINAL. Part I - Multiple Choice Questions: Part I - Multiple Choice Questions: SAMPLE FINAL 1. Which of the following is not a characteristic of a perfectly competitive market? a. Firms are price takers. b. Firms have difficulty entering the market.

More information

AP MICRO Week 4 Practice Quiz: M, 20

AP MICRO Week 4 Practice Quiz: M, 20 1 1. A marketing survey shows that gate receipts would increase if the price of tickets to a summer rock concert increased, even though the number of tickets sold would fall. What does this imply about

More information

Ch. 6 Lecture Notes I. Price Elasticity of Demand 4. CONSIDER THIS A Bit of a Stretch

Ch. 6 Lecture Notes I. Price Elasticity of Demand 4. CONSIDER THIS A Bit of a Stretch Ch. 6 Lecture Notes I. Price Elasticity of Demand A. Law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not

More information

10 : Theory of Demand

10 : Theory of Demand 10 : Theory of Demand 1 Recap from last session Change in Demand Supply, Law of Supply Market Equilibrium Change in Equilibrium 2 A Shift in Both Supply and Demand Price of Ice-Cream Cone Large increase

More information

How Does A Perfectly Competitive Market Reach Long Run Equilibrium?

How Does A Perfectly Competitive Market Reach Long Run Equilibrium? How Does A erfectly Competitive Market Reach Long Run Equilibrium? Side-by-side graph for perfectly completive industry and firm. Is the firm making a profit or a loss? Why? S $15 $15 MR=D AVC D 5000 Industry

More information

Graph 1: Market equilibrium

Graph 1: Market equilibrium ISSN 1314-74, Volume 9, 015 CONSUMER AND PRODUCER SURPLUS CHANGES AFTER TAXATION Fran Galetic Faculty of Economics and Business Zagreb, University of Zagreb, J.F. Kennedy square 6, 10000 Zagreb, Croatia

More information

Chapter 10 Market Power: Monopoly and Monosony Monopoly: market with only one seller. Demand function, TR, AR, and MR

Chapter 10 Market Power: Monopoly and Monosony Monopoly: market with only one seller. Demand function, TR, AR, and MR ECON191 (Spring 2011) 27 & 29.4.2011 (Tutorial 9) Chapter 10 Market Power: Monopoly an Monosony Monopoly: market with only one seller a Deman function, TR, AR, an P p=a bq ( q) AR( q) for all q except

More information

Chapter 3 Quantitative Demand Analysis

Chapter 3 Quantitative Demand Analysis Managerial Economics & Business Strategy Chapter 3 uantitative Demand Analysis McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. The Elasticity Concept

More information

Problem Set- Chapter 2 Solutions

Problem Set- Chapter 2 Solutions roblem Set- Chapter 2 Solutions 1. Ch 2, roblem 2.1 The demand for beer in Japan is given by the following equation: d 700 2 N + 0.1I, where is the price of beer, N is the price of nuts, and I is average

More information

CASE FAIR OSTER 2012 Pearson Education, Inc. Publishing as Prentice Hall Prepared by: Fernando Quijano & Shelly Tefft

CASE FAIR OSTER 2012 Pearson Education, Inc. Publishing as Prentice Hall Prepared by: Fernando Quijano & Shelly Tefft P R I N C I P L E S O F ECONOMICS T E N T H E D I T I O N CASE FAIR OSTER Prepared by: Fernando Quijano & Shelly Tefft of 3 Elasticity 5 CHAPTER OUTLINE Price Elasticity of Demand Slope and Elasticity

More information

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes

More information

A Simple Model of Pricing, Markups and Market. Power Under Demand Fluctuations

A Simple Model of Pricing, Markups and Market. Power Under Demand Fluctuations A Simle Model of Pricing, Markus and Market Power Under Demand Fluctuations Stanley S. Reynolds Deartment of Economics; University of Arizona; Tucson, AZ 85721 Bart J. Wilson Economic Science Laboratory;

More information

Chapter 4: Elasticity. Monday, June 28 Tuesday, June 29

Chapter 4: Elasticity. Monday, June 28 Tuesday, June 29 Chapter 4: Elasticity Monday, June 28 Tuesday, June 29 price PERFECTLY INELASTIC SUPPLY 100 90 80 70 60 50 40 30 10 0 0 10 30 40 50 60 70 80 90 100 quantity S=60 =160-2P Quantity supplied doesn t depend

More information

Demand, Supply and Elasticity

Demand, Supply and Elasticity Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

More information

Topics in Macroeconomics 2 Econ 2004

Topics in Macroeconomics 2 Econ 2004 Topics in Macroeconomics 2 Econ 2004 Practice Questions for Master Class 2 on Monay, March 2n, 2009 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

More information

Imperfect Competition: Monopoly

Imperfect Competition: Monopoly Ierfect Coetition: Monooly New Toic: Monooly Q: What is a onooly? A onooly is a fir that faces a downward sloing deand, and has a choice about what rice to charge an increase in rice doesn t send ost or

More information

Elasticity: The Responsiveness of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply Chapter 6 Elasticity: The Responsiveness of Demand and Supply Chapter Outline 61 LEARNING OBJECTIVE 61 The Price Elasticity of Demand and Its Measurement Learning Objective 1 Define the price elasticity

More information

17. Suppose demand is given by Q d = 400 15P + I, where Q d is quantity demanded, P is. I = 100, equilibrium quantity is A) 15 B) 20 C) 25 D) 30

17. Suppose demand is given by Q d = 400 15P + I, where Q d is quantity demanded, P is. I = 100, equilibrium quantity is A) 15 B) 20 C) 25 D) 30 Ch. 2 1. A relationship that shows the quantity of goods that consumers are willing to buy at different prices is the A) elasticity B) market demand curve C) market supply curve D) market equilibrium 2.

More information

Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus Consumer and Consumer and February 6, 2007 Reading: Chapter 6 Introduction Consumer surplus Producer surplus Efficiency and the gains from trade s 2 Introduction Connections to: Opportunity costs to consumers

More information

Examples on Monopoly and Third Degree Price Discrimination

Examples on Monopoly and Third Degree Price Discrimination 1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market

More information

2011 Pearson Education. Elasticities of Demand and Supply: Today add elasticity and slope, cross elasticities

2011 Pearson Education. Elasticities of Demand and Supply: Today add elasticity and slope, cross elasticities 2011 Pearson Education Elasticities of Demand and Supply: Today add elasticity and slope, cross elasticities What Determines Elasticity? Influences on the price elasticity of demand fall into two categories:

More information

ECF1100 Microeconomics

ECF1100 Microeconomics ECF1100 Microeconomics Semester 2, 2015 Notes Textbook: Gans, King, Byford and Mankiw, Principles of Microeconomics 6th Edition, Cengage Learning, Copyright 2015 (ISBN 9780170248525). Contents Week 1 Introduction

More information

Elasticity Revision Summary

Elasticity Revision Summary Elasticity Revision ummary Elasticity a measure of how responsive one variable is to another rice Elasticity of emand Measures the responsiveness of demand to a change in price. E = % change in % change

More information

Unit Perfect Competition Unit Overview

Unit Perfect Competition Unit Overview Unit 2.3.2 - erfect competition Assumptions of the model Demand curve facing the industry and the firm in perfect competition rofit-maximizing level of output and price in the short-run and long-run The

More information

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

More information

d d Calculating Price Elasticity of Demand: The Midpoint or Arc Method

d d Calculating Price Elasticity of Demand: The Midpoint or Arc Method Microeconomics Topic 5: Discuss factors that determine demand and supply elasticity. Explain how demand and supply elasticity affect tax policy and the consequences of business decisions. Reference: Gregory

More information

Quantity Tax Incidence Subsidy Welfare Effects Case Study. Equilibrium Chapter 16

Quantity Tax Incidence Subsidy Welfare Effects Case Study. Equilibrium Chapter 16 Equilibrium Chapter 16 Competitive Equilibrium: Motivating Questions Firms are price-takers in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens

More information

C H A P T E R 4: The Price System, Demand and Supply, and Elas ticity. The Price System: Rationing and Allocating Resources

C H A P T E R 4: The Price System, Demand and Supply, and Elas ticity. The Price System: Rationing and Allocating Resources C H A P T E R 4 The Price System, Demand and Supply, and Elasticity Prepared by: Fernando Quijano and Yvonn Quijano Karl Case, Ray Fair The Price System: Rationing and Allocating Resources The market system,

More information

Review for the Midterm Exam.

Review for the Midterm Exam. Review for the Midterm Exam. 1. Chapter 1 The principles of decision making are: o People face tradeoffs. o The cost of any action is measured in terms of foregone opportunities. o Rational people make

More information

Problems: Table 1: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2

Problems: Table 1: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2 Problems: Table 1: Labor Hours needed to make one Amount produced in 90 hours: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2 1. Refer to Table 1. For Carolyn, the opportunity cost of 1

More information

THE ELASTICITY OF DEMAND

THE ELASTICITY OF DEMAND In this chapter, look for the answers to these questions: What is elasticity? What kinds of issues can elasticity help us understand? What is the price elasticity of demand? How is it related to the demand

More information

Microeconomics Instructor Miller Perfect Competition Practice Problems

Microeconomics Instructor Miller Perfect Competition Practice Problems Microeconomics Instructor Miller Perfect Competition Practice Problems 1. Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous

More information

Double Integrals in Polar Coordinates

Double Integrals in Polar Coordinates Double Integrals in Polar Coorinates Part : The Area Di erential in Polar Coorinates We can also aly the change of variable formula to the olar coorinate transformation x = r cos () ; y = r sin () However,

More information

Elasticity and Its Application

Elasticity and Its Application Elasticity and Its Application Chapter 5 Elasticity... is a measure of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision.

More information

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is 1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit

More information

Price. Elasticity. Demand

Price. Elasticity. Demand + Price Elasticity of Demand + n Elasticity = measure the responsiveness of one variable to changes in another variable. n Price elasticity of demand measures the responsiveness of demand to changes in

More information

Pre-Test Chapter 18 ed17

Pre-Test Chapter 18 ed17 Pre-Test Chapter 18 ed17 Multiple Choice Questions 1. (Consider This) Elastic demand is analogous to a and inelastic demand to a. A. normal wrench; socket wrench B. Ace bandage; firm rubber tie-down C.

More information

Elasticity. Ratio of Percentage Changes. Elasticity and Its Application. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity...

Elasticity. Ratio of Percentage Changes. Elasticity and Its Application. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity... Elasticity and Its Application Chapter 5 All rights reserved. Copyright 21 by Harcourt, Inc. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

Lecture 6 Part I. Markets without market power: Perfect competition

Lecture 6 Part I. Markets without market power: Perfect competition Lecture 6 Part I Markets without market power: Perfect competition Market power Market power: Ability to control, or at least affect, the terms and conditions of the exchanges in which one participates

More information

Chapter 4 Elasticities of demand and supply. The price elasticity of demand

Chapter 4 Elasticities of demand and supply. The price elasticity of demand Chapter 4 Elasticities of demand and supply The price elasticity of demand measures the sensitivity of the quantity demanded of a good to a change in its price It is defined as: % change in quantity demanded

More information

Econ 2113 Test 2A Pledge: I have neither given nor received aid on this exam.

Econ 2113 Test 2A Pledge: I have neither given nor received aid on this exam. Econ 2113 Test 2A Dr. Rupp Spring 2011 Name: Pledge: I have neither given nor received aid on this exam. Signature: Multiple Choice Identify the choice that best completes the statement or answers the

More information

Microeconomics Instructor Miller Practice Problems Monopolistic Competition

Microeconomics Instructor Miller Practice Problems Monopolistic Competition Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.

More information

Monopoly. Monopoly. Causes of Monopolies. Profit Maximization. ECON 370: Microeconomic Theory. Summer 2004 Rice University Stanley Gilbert

Monopoly. Monopoly. Causes of Monopolies. Profit Maximization. ECON 370: Microeconomic Theory. Summer 2004 Rice University Stanley Gilbert Monool market with a single seller Monool ECON 370: Microeconomic Theor Firm demand = market demand Firm demand is downward sloing Monoolist can alter market rice b adjusting its own outut level Summer

More information

What is Adverse Selection. Economics of Information and Contracts Adverse Selection. Lemons Problem. Lemons Problem

What is Adverse Selection. Economics of Information and Contracts Adverse Selection. Lemons Problem. Lemons Problem What is Adverse Selection Economics of Information and Contracts Adverse Selection Levent Koçkesen Koç University In markets with erfect information all rofitable trades (those in which the value to the

More information

Elasticities can be estimated from records of past experience or test markets by the statistical technique of multiple regression.

Elasticities can be estimated from records of past experience or test markets by the statistical technique of multiple regression. Chapter 3 Elasticity Chapter 3: Elasticity CHAPTER SUMMARY The elasticity of demand measures the responsiveness of demand to changes in a factor that affects demand. Elasticities can be estimated for price,

More information

(P 2 P 1 )/[(P 1 + P 2 )/2]. It shows how flexible sellers are to a change in price.

(P 2 P 1 )/[(P 1 + P 2 )/2]. It shows how flexible sellers are to a change in price. September 15, 2008 Elasticity of supply The price elasticity of supply measures how quantity offered of a good responds to a change in the good s price. It is defined the same as price elasticity of demand,

More information

Figure 1, A Monopolistically Competitive Firm

Figure 1, A Monopolistically Competitive Firm The Digital Economist Lecture 9 Pricing Power and Price Discrimination Many firms have the ability to charge prices for their products consistent with their best interests even thought they may not be

More information

Econ 201 Lecture 8. Price Elasticity of Demand A measure of the responsiveness of quantity demanded to changes in price.

Econ 201 Lecture 8. Price Elasticity of Demand A measure of the responsiveness of quantity demanded to changes in price. Econ 01 Lecture 8 rice Elasticity of emand measure of the responsiveness of quantity demanded to changes in price. Highly responsive = "elastic" Highly unresponsive = "inelastic" rice elasticity of demand

More information

TOPIC 4: ELASTICITY AND ITS APPLICATIONS

TOPIC 4: ELASTICITY AND ITS APPLICATIONS TOPIC 4: ELASTICITY AND ITS APPLICATIONS Dr Micheál Collins mlcollin@tcd.ie TOPIC 4: ELASTICITY AND ITS APPLICATIONS 1. Introduction 2. Price Elasticity of Demand Definition Categories Determinants Elasticity

More information

Elasticity. Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes.

Elasticity. Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes. Elasticity The price elasticity of demand measures the sensitivity of the quantity demanded to changes in the price. Demand is inelastic if it does not respond much to price changes, and elastic if demand

More information

Tax, Subsidy, and General Equilibrium

Tax, Subsidy, and General Equilibrium Tax. rinciples of Microeconomics, Fall hia-hui hen October, Lecture Tax, ubsidy, and General Equilibrium Outline. hap : Tax. hap : ubsidy. hap : General Equilibrium. hap : Exchange Economy Tax Government

More information

Chapter 5 Elasticity of Demand and Supply. These slides supplement the textbook, but should not replace reading the textbook

Chapter 5 Elasticity of Demand and Supply. These slides supplement the textbook, but should not replace reading the textbook Chapter 5 Elasticity of Demand and Supply These slides supplement the textbook, but should not replace reading the textbook 1 What is total revenue? Price multiplied by the quantity sold at that price

More information

1 Gambler s Ruin Problem

1 Gambler s Ruin Problem Coyright c 2009 by Karl Sigman 1 Gambler s Ruin Problem Let N 2 be an integer and let 1 i N 1. Consider a gambler who starts with an initial fortune of $i and then on each successive gamble either wins

More information

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!!

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications

More information

AP Microeconomics Review

AP Microeconomics Review AP Microeconomics Review 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return

More information

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 MIDTERM EXAM will be on March 29 Everything you earn and many things you buy are taxed. Who really pays these taxes? Tax Incidence is the division

More information