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Review:
Changes in quantity demand and supplied or movements along the curves Changes in demand and supply or shifts of the curve
Comparative Statics
Changes in demand
Increase in demand: price increases, quantity increases Decrease in demand: price decreases, quantity decreases
Changes in supply
Increase in supply: price decreases, quantity increases Decrease in supply: price increases, quantity decreases
Changes in both
Increase in Demand
Increase in Supply Decrease in Supply P ambiguous Q increases
Decrease in Demand
P decreases Q ambiguous
Dynamics
Shifts in demand or supply create surpluses or shortages Surpluses cause price to fall and shortages cause price to rise Increases in prices cause quantity demanded to decrease (law of demand) and quantity supplied to increase (law of supply) Decreases in prices cause quantity demanded to increase (law of demand) and quantity supplied to decrease (law of supply) These price changes occur until surpluses or shortages are eliminated at the new equilibrium price and quantity
Definition of Elasticity
Price elasticity of demand = %change in quantity demanded/ % change in price Or using symbols: Ep = %Qd /%P For example, if the %Qd = 10% and the %P = 2%, the price elasticity of demand = 5, OR for every 1% change in price the quantity demand changes by 5%.
Ep = 1 unit elastic
%Qd = %P
It is easy to show this with a graph. But first we need yet another concept: Total Revenue = Price x Quantity
Ep = 1 unit elastic
%Qd (5%)= %P (5%) if P goes down (up) total revenue stays the same
S2
3. . . . and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220.
Copyright2003 Southwestern/Thomson Learning
Elasticity of Demand
Elasticity of Supply
How how about the price elasticity of supply? How responsive are suppliers to changes in price? Price elasticity of supply = %change in quantity supplied/% change in price Determinants of elasticity of supply:
Flexibility in altering the amount of a good produced. Time period
Elasticity of Supply
Luxury Taxes
Who pays a tax? But with elasticity we find out Who really pays the tax? (tax incidence or burden).