Extensions of Demand and Supply Analysis
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1 Revenue 18 Extensions of Demand and Supply Analysis 18-1
2 Revenue 18-2 Chapter Objectives and How It Can Be Applied The Usefulness of the Total Revenue for Price Elasticity and How It Can Be Applied and Consumer,, and Efficiency Losses
3 Revenue 18-3 Measuring Responsiveness to Price Changes Relatively Elastic or Inelastic Price-Elasticity Coefficient and Formula E d = Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X O 18.1
4 Revenue 18-4 Formula Restated E d = Change in Quantity Demanded of X Original Quantity Demanded of X Change in Price of X Original Price of X Using Averages Midpoint Formula Change in Quantity E d = Sum of Quantities/2 W 18.1 Change in Price Sum of Prices/2
5 Revenue 18-5 Why Use Percentages? Elimination of the Minus Sign Interpretations of E d Elastic Demand Inelastic Demand Unit Elasticity E d = E d = E d = = = = 1
6 Revenue 18-6 Extreme Cases Perfectly Inelastic Demand P 0 Perfectly Elastic Demand P 0 D 1 Perfectly Inelastic Demand (E d = 0) Perfectly Elastic Demand (E d = ) D 2 Q Q
7 The Revenue 18-7 (TR) TR = P x Q Elastic Demand P $3 2 1 a b D Q W 18.2
8 The Revenue 18-8 (TR) TR = P x Q Inelastic Demand P $ c d D Q W 18.2
9 The Revenue 18-9 (TR) TR = P x Q Unit-Elastic P $3 2 1 e f D Q W 18.2
10 Revenue Linear Demand for Movie Tickets as Measured by the Elasticity Coefficient Revenue (1) Total Quantity of Tickets Demanded Per Week, Thousands (2) Price Per Ticket (3) Elasticity Coefficient (E d ) (4) (1) X (2) $8,000 14,000 18,000 20,000 20,000 18,000 14,000 8,000 (5) Total-Revenue Elastic Elastic Elastic Unit Elastic Inelastic Inelastic Inelastic G 18.1 Graphically
11 (Thousands of Dollars) Price Revenue and the Total-Revenue $8 a 7 b 6 c 5 d 4 e 3 f 2 g 1 h Quantity Demanded D $ TR Quantity Demanded Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1 Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1
12 Revenue Price Elasticity Substitutability Proportion of Income Luxuries versus Necessities Time Applications: Large Crop Yields Excise Taxes Decriminalization of Illegal Drugs
13 Revenue E s = Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X Unit Elastic Supply E s = 1 Market Period: Not Enough Time to Shift Resources Greatest Price Impact P P m P 0 S m O 18.2 Q 0 D 1 D 2 Q 18-13
14 Revenue E s = Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X O 18.2 Inelastic Supply E s < 1 Short Run: Resources Not Easily Shifted to Alternative Uses Lower Price Impact P P s P 0 S s Q 0 Q s D 1 D 2 Q 18-14
15 Revenue E s = Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X Elastic Supply E s > 1 Long Run: Resources Easily Shifted to Alternative Uses Least Price Impact P P l P 0 S l O 18.2 Q 0 Q l D 1 D 2 Q 18-15
16 Revenue Applications Antiques and Reproductions Volatile Gold Prices 18-16
17 Revenue E xy = Substitute Goods Positive Sign Complementary Goods- Negative Sign Independent Goods Zero or Near-Zero Value Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product Y
18 Revenue E i = Percentage Change in Quantity Demanded Percentage Change in Income Normal Goods Positive Sign Inferior Goods- Negative Sign Insights into the Economy 18-18
19 Price (Per Bag) Revenue Consumer P 1 Consumer Q 1 Quantity (Bags) Equilibrium Price = $8 D O 18.3
20 Price (Per Bag) Revenue P 1 Q 1 Quantity (Bags) S Equilibrium Price = $8
21 Price (Per Bag) Revenue Efficiency Revisited P 1 Consumer Q 1 Quantity (Bags) S Equilibrium Price = $8 D W 18.3
22 Price (Per Bag) Revenue Efficiency Revisited Efficiency Losses (Deadweight Losses) P 1 Efficiency Losses Q 2 Q 3 Q 1 Quantity (Bags) S D
23 Revenue Elasticity and Pricing Power: Why Different Consumers Pay Different Prices All Buyers in a Highly Competitive Market Pay the Same Price Regardless of Their Elasticities Difficulty in Applying Different Prices Observe Differences in Group Elasticities Business Travelers Leisure Travelers Discounting for Children Different Net Prices for College Tuition
24 Revenue price elasticity of demand midpoint formula elastic demand inelastic demand unit elasticity perfectly inelastic demand perfectly elastic demand total revenue test (TR) total-revenue test price elasticity of supply market period short run long run cross-elasticity of demand income elasticity of demand consumer surplus producer surplus efficiency losses (deadweight losses) 18-24
25 Next Chapter Preview Revenue Consumer Behavior And Utility Maximization 18-25
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