ECON 251 1st Edition Lecture 5 Outline of Last Lecture I. TermsII. Shifts in DemandIII. Factors that Change DemandIV. SupplyV. Changes in SupplyVI. Supply and Demand TogetherOutline of Current Lecture I. TermsII. Changes in EquilibriumIII. Simultaneous Changes in Demand and SupplyIV. ElasticityV. The Ranges of ƐdVI. Determinates of ƐdVII. Calculating ƐdCurrent LectureI. TermsElasticity: “responsiveness”Price Elasticity of Demand: ƐdII. Changes in EquilibriumExample: the market for cars- An increase in income (where cars are normal goods) this causes the demand to increase (shift right)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Q increases even though P also increased because the demand shifted (due to the increased income)- P rises because D increased- Consumers want to buy the amount of Q3 but at the price of P*- But because the P rose, consumers back off to Q’- An increase in the price of steel Causes a decrease in the supply (shifts left)A decrease in supply causes an increase in the price and a decrease in the quantityAn increase in supply causes a decrease in price and an increase in quantityIII. Simultaneous Changes in Demand and SupplyExample: the market for cars- An increase in income, and an increase of steel Inc D = inc P* + inc Q* dec S = inc P* + dec Q*Problem: the quantity shift is contradictory! So which way would the quantity shift? Increase or decrease? This means that the quantity is indeterminate.WARNING: DO NOT GRAPH BOTH THE DEMAND AND THE SUPPLY SHIFT ON ONE GRAPHThis leads to incorrect conclusions.Example: the market for calculators- A decrease in the cost of producing calculators: an increase in supply and an increase in demandInc S = dec P* + inc Q*Inc D = inc P* + inc Q*P is indeterminateWe know that prices have fallen, therefore we can conclude that:Inc S > Inc DIV. ElasticityPrice elasticity to demand: the responsiveness of consumers to a change in price.Less response = “less elastic D” More response = “more elastic D”Slope of D = ∆ Qd∆ Qd1/Slope = = ∆ Qd∆ PresponsivenessWe need a unit-free measure = percentage changes|(% ∆Qd% ∆ P)| = price elasticity of demand = Ɛd(absolute value)V. The Ranges of Ɛd1. Ɛd > 1 num >denom “big” ΔQd= Demand is elastic2. Ɛd < 1 num<denom “small” ΔQd= Demand is inelastic3. Ɛd = 1 num = denom= Demand is unit elasticVI. Determinates of Ɛd1. Availability of substitutes for productsa. Fewer substitutes -> demand is less elasticb. More substitutes -> demand is more elasticExample: Substitutes for Coke: PepsiOrange sodaSpriteRoot beerWaterLemonadeTeaJuiceMore substitutes: Demand is more elasticSubstitutes for Soda:WaterLemonadeTeaJuiceLess substitutes: Demand is less elastic2. Portion of budget/income required to purchasea. Larger portion -> Demand more elasticb. Smaller portion -> Demand less elastic3. Timea. Less time (to make a decision) -> Demand less elastic (if it’s something you need at the last second, you are more likely to buy at a higher price because you can’t wait until the prices decrease)b. More time -> Demand more elasticVII. Calculating ƐdƐd = abs(% ∆Q∗¿% ∆ P¿)%∆ Qd = ∆ Q dbaseQd x 100%∆ P = ∆ Pbase P x 100 Notice that the 100s cancel each other outBase Qd = average QdBase P = average PƐd = abs(∆ Qdavg Qd∆ Pavg P) = ∆ Qd∆ P*avg Pavg
View Full Document