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by: Norbert Terry


Norbert Terry
GPA 3.85


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Class Notes
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This 21 page Class Notes was uploaded by Norbert Terry on Thursday October 15, 2015. The Class Notes belongs to ARE 012 at North Carolina State University taught by Staff in Fall. Since its upload, it has received 29 views. For similar materials see /class/223768/are-012-north-carolina-state-university in Agricultural & Resource Econ at North Carolina State University.

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Date Created: 10/15/15
ltgt Price Elasticity of Demand Lecture 1 U and Curves Show How Sensitive sumers are to Price Changes Relatively inelastic 1 Quantity demanded is not affected very much by price changes 2 Therefore not very sensitive to price changes 3 Not many substitutes short period of time and small proportion of budget Demand 4 A Q is not as great as the A P Quantity Demanded unit time and Curves Show How Sensitive sumers are to Price Changes Relatively elastic Demand 1 Quantity dernanded is affected very much by price Changes 2 Therefore very sensitive to price Changes 3 Many substitutes long period of time and large proportion of budget Quantity Demanded unit time 3 4 A Q is greater than the A P Price tic 0r com Here the slope relates that the 6 quantity demanded is very 5 39 sensitive to price changes 4 3 2 1 o o 100 200 300 400 500 1000 bu month 4 Price HNUJHgtU1 stic Corn BUT a change in the scale of measure changes the graph so as to make it look as though the quantity demanded is NOT very sensitive to changes in price 3 4 5 million bu month 5 ulating Elasticity Due to the problems with scaling depicted here we rely on a mathematical determination of elasticity Elasticity of Demand Ed Ed percentage change in quantity demanded percentage change in price ulatin Ed 99 8 Ed All 3 of these equations yield the same answer AQd AP AQdAP P0Q0 1 Slope P0 Q0 rpreting an Elasticity mate If Ed were to 75 what does it tell us For every 1 change in price Qd will change 75 in the opposite direction ple P08 P17 Q040 Q148 Step1 AQ 48408 AP 781 Step 2 Use the formula for Ed 10 ltgt Step 3 Ed AQdAPP0Q0 8 1 gt6 840 16 11 Step 4 This means that for every 1 change in price that there is a 16 change in quantity demanded in the opposite direction 12 Since we know that an Ed 16 means that a 1 change in price results in a 16 change in quantity demanded in the opposite direction What would a 20 increase in price result in 13 Step 1 Ed 0oAQAP Step 2 0oAQ Ed AP Step3 OOAQ 16 2000 3200 14 What would a 20 increase in the quantity demanded result in Step1 Ed 00AQ00AP Step 2 0oAP 1 Ed 0oAQ 15 Step 3 00AP 116 2000 12500 If you have trouble with algebraic derivations of an equation then REMEMBER 00AP X Ed 00AQ 00 AQd X lEd 00AP 17 We now know how to mathematically determine Ed what does it tell us about elasticity Economist usually drop the negative sign of the elasticity of demand for they know that P T 2 Q l 18 IEd I gt 1 2 elastic demand very responsive to price changes IEd lt 1 2 inelastic demand not very sensitive to prices IEd I 1 gtunitary elastic ratio of As 1 19 IEdI gt1gt OoAQ gt AP IEdIlt 1gtAQ lt OoAP IEd 1gtAQ AP 20 Estimates of Price Elasticity emand at Retail in the US Ed beef 6438 pork 4130 chicken 7773 milk 3455 sugar 2419 bread 1500 all foods 2368 non foods 10179 21


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