microlec1(basicsd) elasticity of demand , income demand

microlec1(basicsd) elasticity of demand , income demand

1. DEMANDDEMAND
•The relationship between demand and The relationship between demand and
priceprice
–the law of demandthe law of demand
–the income effectthe income effect
–the substitution effectthe substitution effect
•The demand curveThe demand curve

2. DEMANDDEMAND
•Other determinants of demandOther determinants of demand
–tastestastes
–number and price of substitute goodsnumber and price of substitute goods
–number and price of complementary goodsnumber and price of complementary goods
–incomeincome
–distribution of incomedistribution of income
–expectationsexpectations
•Movements along and shifts in the demand Movements along and shifts in the demand
curvecurve

3. D
1
P
r
ic
e
P
O Q
0
Q
1
Quantity
An increase in demandAn increase in demand
D
0

4. SUPPLYSUPPLY
•The relationship between supply and priceThe relationship between supply and price
•The supply curveThe supply curve
–why supply curves generally slope upwardswhy supply curves generally slope upwards
•Other determinants of supplyOther determinants of supply
–costs of productioncosts of production
–profitability of alternative products (substitutes in profitability of alternative products (substitutes in
supply)supply)
–profitability of goods in joint supplyprofitability of goods in joint supply
–nature and other random shocksnature and other random shocks
–aims of producersaims of producers
–expectations of producersexpectations of producers
–Number of producersNumber of producers

5. P
QO
S
2
S
0 S
1
IncreaseDecrease
Shifts in the supply curveShifts in the supply curve

6. 0
4
8
12
16
20
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
P
r
ic
e

(
p
e
n
c
e

p
e
r

k
g
)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
The determination of market equilibriumThe determination of market equilibrium
(potatoes: monthly)(potatoes: monthly)

7. 0
4
8
12
16
20
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
P
r
ic
e

(
p
e
n
c
e

p
e
r

k
g
)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
SHORTAGE
(300 000)
The determination of market equilibriumThe determination of market equilibrium
(potatoes: monthly)(potatoes: monthly)

8. 0
4
8
12
16
20
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
P
r
ic
e

(
p
e
n
c
e

p
e
r

k
g
)
E
D
C
B
Aa
b
c
d
e
SURPLUS
(330 000)
Supply
Demand
The determination of market equilibriumThe determination of market equilibrium
(potatoes: monthly)(potatoes: monthly)

9. 0
4
8
12
16
20
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
P
r
ic
e

(
p
e
n
c
e

p
e
r

k
g
)
E
D
C
B
Aa
b
c
d
e
Q
e
P
e
Supply
Demand
The determination of market equilibriumThe determination of market equilibrium
(potatoes: monthly)(potatoes: monthly)

10. P
Q
O
P
e
1
P
e
2
Q
e
1
Q
e
2
S
g
h
i
D
1
D
2
Effect of a shift in the demand curveEffect of a shift in the demand curve

11. P
Q
O
P
e
1
P
e
3
Q
e
3
Q
e
1
D
S
1
S
2
j g
k
Effect of a shift in the supply curveEffect of a shift in the supply curve

12. ELASTICITYELASTICITY
• ElasticityElasticity
–use of proportionate or percentage changesuse of proportionate or percentage changes
–the sign (positive or negative)the sign (positive or negative)
–the value (greater or less than one)the value (greater or less than one)
•Price elasticity of demand (Price elasticity of demand (PPdd): ):
determinantsdeterminants
–number and closeness of substitute goodsnumber and closeness of substitute goods
–the proportion of income spent on the goodthe proportion of income spent on the good
–timetime

13. ELASTICITYELASTICITY
•Price elasticity of demand and consumer Price elasticity of demand and consumer
expenditure (expenditure (P x QP x Q))
–effects of a price change on expenditure: effects of a price change on expenditure:
elastic demandelastic demand
–effects of a price change on expenditure: effects of a price change on expenditure:
inelastic demandinelastic demand
–extreme casesextreme cases
–applications to price decisionsapplications to price decisions

14. ELASTICITYELASTICITY
•Measurement of elasticity: arc elasticityMeasurement of elasticity: arc elasticity
–the formula for price elasticity of demand: the formula for price elasticity of demand:
Q/QQ/Q ÷ ÷ P/PP/P
–using the average or 'mid-point' methodusing the average or 'mid-point' method

15. 0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
m
n
Q P
mid Q mid P
P
d
=
10 2
15 7
=
= 10/15 x 7/2
= 70/30
= 7/3 = 2.33
Demand
Measuring elasticity using the arc methodMeasuring elasticity using the arc method

16. ELASTICITYELASTICITY
•Measurement of elasticity: point elasticityMeasurement of elasticity: point elasticity
–the formula for price elasticity of demand: the formula for price elasticity of demand:
ddQ/Q/ddP x P/QP x P/Q
–the elasticity of a straight-line demand ‘curve’ the elasticity of a straight-line demand ‘curve’
(constant d(constant dQQ/d/dPP))
–the elasticity of a curved demand curve: dthe elasticity of a curved demand curve: dQQ/d/dPP
is the tangent to the curveis the tangent to the curve

17. P
Q
50
30
0 40 100
D
r
P
d
= (1 / slope) x P/Q
= 100/50 x 30/40
= 60/40
= 1.5
Measuring elasticity at a pointMeasuring elasticity at a point

18. D
1
D
2
S
i
S
S
S
L
P
1
P
4
P
3
P
2
Q
1Q
3
Q
4
P
Q O
a
b
c
d
Supply in different time periodsSupply in different time periods

19. ELASTICITYELASTICITY
•Income elasticity of demandIncome elasticity of demand
–measurementmeasurement
–determinantsdeterminants
–applicationsapplications
•Cross-price elasticity of demandCross-price elasticity of demand
–measurementmeasurement
–determinantsdeterminants
–applicationsapplications