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## economics laws of supply, demand, and elasticity

by: Brendan O'Donnell

47

1

7

# economics laws of supply, demand, and elasticity Economics 22060-002

Marketplace > Kent State University > Economcs > Economics 22060-002 > economics laws of supply demand and elasticity
Brendan O'Donnell
KSU

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covers the topics in depth of the affects of consumer actions on supply and demand. covers the laws of elasticity and the effect consumers have on elasticity of products
COURSE
PRINCIPLES OF MICROECONOMICS
PROF.
Harris, Jeremiah R.
TYPE
Bundle
PAGES
7
WORDS
CONCEPTS
Economics
KARMA
75 ?

## Popular in Economcs

This 7 page Bundle was uploaded by Brendan O'Donnell on Tuesday February 2, 2016. The Bundle belongs to Economics 22060-002 at Kent State University taught by Harris, Jeremiah R. in Winter 2016. Since its upload, it has received 47 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Kent State University.

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Date Created: 02/02/16
Elasticity  Elasticity: measure of responsiveness  If you change something such as the price, how does the quantity respond   Price Elasticity of Demand:   Can we use the slope of the line?   No, the slope will always be based on the unit of measurements of the quantity; i.e.    Slope = ­ \$5 / 2   Will results in an invalid comparison across different goods  We want a measurement that is independent of the units of measurement  Units of measurement vary so we need “unit­free” measure → Use percentage changes:  %∆Qd divided by %∆P  Starting point→ Use percentage changes Price Elasticity of Demand = (εd)  =   %∆Qd      %∆P  Factors That Influence the Elasticity of Demand    The closeness of substitutes  The time elapsed since a price change  Availabilities of substitutes  Lots of substitutes  →Demand more elastic  Fewer substitutes  →Demand less elastic  Example:   Luxuries, such as exotic vacations, generally have elastic demand (lots of  substitutes).  Necessities, such as food or housing, generally have inelastic demand (not as  many substitutes).  Small proportion of budget   →Demand less elastic  Large proportion of budget   → Demand more elastic  Example:   Small proportion: consider a candy bar, a 50% increase in price does not change  demand much  Large proportion: consider the purchase of your first home, a 50% increase in  price does change things  Time Elapsed Since Price Change  More time → Demand more elastic  Less time → Demand less elastic  The more time consumers have to adjust to a price change, the more elastic is the demand for that good.  Key Rules  If   εd > 1 then revenue changes the same direction as the quantity  εd < 1 then revenue changes the same direction as the price  Managerial rule: if demand is inelastic then raise prices to increase revenue.    Cross­Price Elasticity of Demand: a measure of the responsiveness of demand for a good  to a change in the price of a ______________________, other things remaining the same.  Income Elasticity of Demand: measures how the quantity demanded of a good responds  to a change in income, other things remaining the same.  Income elasticity=   Elasticity of Supply: measures the responsiveness of the quantity supplied to a change in  the price of a good when all other influences on selling plans remain the same.  εs =                       >0  εs >1 elastic  εs <1 inelastic  εs =1 unit elastic  Availability of substitute inputs  Fewer substitute inputs (Van Gogh Painting)   → less elastic supply  More substitute inputs (Wheat/Corn)  → more elastic supply   Time  More time → more elastic supply  Less time → less elastic supply  Elasticity (price, cross­price, income, supply) : intuition and how to calculate  Elastic, Inelastic, Unit elastic: appropriate ranges, and location on graph compared to  midpoint  Extremes: Perfectly elastic or inelastic  Relationship between revenue and elasticity Laws of Demand  Diminishing Marginal Return: the tendency for additional units to provide less  satisfaction than previous units  Law of demand: Inverse relationship between price and quantity demanded; i.e. higher  price, less demanded  Generally we assume a linear relationship between price (P) and quantity demanded (Qd)  The demand gives us the marginal benefit of the last good purchased.  Imagine that the demand for snickers is represented by: P= ­2 Qd + 12  At a P = 6,  Qd = ___  Thus the 3  Snickers is worth \$6.  Likewise, we know that the addition of one more Snickers is only worth \$4, Law of  Diminishing Marginal Return   main factors that change demand are o The prices of related goods  o Expected future prices o Population o Preferences  .   Prices of related goods  Substitutes: Goods that are related to each other, i.e. Nike and Addidas  Definition: if the price increases for good 1 then the demand increases for good 2; shifts  curve outward  Compliments: Goods that are used together, i.e. milk and cereal  Expectations  Price  expect price to rise → ↑ current demand  expect price to fall  → ↓ current demand     Income  expect income to rise   → ↑ D for normal goods and         ↓ D for inferior goods  Expectations  Price  expect price to rise → ↑ current demand  expect price to fall  → ↓ current demand     Income  expect income to rise   → ↑ D for normal goods and         ↓ D for inferior goods  Expectations  Price  expect price to rise → ↑ current demand  expect price to fall  → ↓ current demand     Income  expect income to rise   → ↑ D for normal goods and         ↓ D for inferior goods Laws of Supply  Supply: maximum quantity a seller is willing and able to sell at various prices  Law of Supply: positive relationship between price and quantity supplied;  i.e. higher prices result in more goods supplied  Similar to the demand side, we usually assume a linear relationship between price and  quantity supplied (Qs)  Supply: maximum quantity a seller is willing and able to sell at various prices  Law of Supply: positive relationship between price and quantity supplied;  i.e. higher prices result in more goods supplied  Similar to the demand side, we usually assume a linear relationship between price and  quantity supplied (Qs)  main factors that change supply are o The prices of factors of production (input prices) o The prices of related goods produced  o The number of suppliers o State of Nature  Input prices:   ▪ ↑ wages paid to labor → ↓ Supply (shift to left)  ▪ ↓ wages paid to labor → ↑ Supply (shift to right)   Expectations  ▪ Price  expect price to rise  expect price to fall  → ↑ current supply  Input prices:  o ▪ ↑ wages paid to labor → ↓ Supply (shift to left) o ▪ ↓ wages paid to labor → ↑ Supply (shift to right)   Expectations  ▪ Price  expect price to rise  expect price to fall  → ↑ current supply  Complements in Production:  Example: beef and leather o ▪↑ P of beef then ↑ S of leather o Number of Suppliers  more sellers  → ↑ S   fewer sellers →  ↓ S  Technology o Advances in technology create new products and lower the cost of producing  existing products. o  Changes in the marginal cost of production o ↓ costs → ↑ supply  State of Nature: o Production influenced by weather events Combining Supply and Demand  Equilibrium: a situation in which opposing forces balance each other. Equilibrium in a  market occurs when the price balances the plans of buyers and sellers.   Equilibrium Price:    Equilibrium Quantity: the quantity bought and sold at the equilibrium price.  Shortage: not enough supply to meet needs   Qs < Qd   P < P*  Price will serve as the regulator and price will rise until P = P*  Surplus: more supply then demand  Qs > Qd  P > P*  Price will fall until P = P*  If only a movement of supply or demand you can draw picture and see how price and  quantity change.  If both supply and demand change at the same time, you cannot definitively say what  happens to both price and quantity—only one or the other.  In this case, separate into two cases (1 for supply and 1 for demand) and see what is  consistent for both.    

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