Download - Ec4004 2008 Lecture 4
![Page 1: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/1.jpg)
Elasticity&
Market DemandDr. Stephen KinsellaEC4004 Lecture 4
![Page 2: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/2.jpg)
Demand Functions
Income & Substitution Effects
Consumer Surplus
Market Demand
Elasticity
![Page 3: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/3.jpg)
![Page 4: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/4.jpg)
Market demand: The total quantity of a good or service
demanded by all potential buyers.
![Page 5: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/5.jpg)
1.
![Page 6: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/6.jpg)
Market demand: The total quantity of a good or service demanded by all potential buyers.
Market demand curve shows the relationship between the total quantity demanded of a single good or service and its price, holding all other factors constant.
![Page 7: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/7.jpg)
(a) Individual 1
PX
XP*
X*1
0
![Page 8: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/8.jpg)
(a) Individual 1
PX
XP*
X*1
0
(b) Individual 2
X*2
0
PX
![Page 9: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/9.jpg)
(a) Individual 1
PX
XP*
X*1
0
(b) Individual 2
X*2
0
(c) Market Demand
X
D
X*0
PX PX
![Page 10: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/10.jpg)
The total QX demanded at market P*X is sum of two
amounts: X* = X*
1 + X*2 .
Point X*, P*X provides one point on the market demand
curve.
Other points on D curve are similarly plotted based on all QX demanded at other PX.
![Page 11: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/11.jpg)
(a) Individual 1
PX
XP*
X*1
0
(b) Individual 2
X*2
0
(c) Market Demand
X
D
X*0
PX PX
X** X** X**
D’
1 2
![Page 12: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/12.jpg)
![Page 13: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/13.jpg)
Related Goods
![Page 14: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/14.jpg)
2.
![Page 15: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/15.jpg)
Elasticity: measures the percentage change in one variable brought about by a 1 percent change in some other variable.
Because it’s measured in percentages, units cancel out - elasticity is a unit-less measure of responsiveness.
![Page 16: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/16.jpg)
Price Elasticity of DemandPrice elasticity of demand: percentage change in quantity of a good demanded in response to a 1 percent change in its price
![Page 17: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/17.jpg)
Price elasticity of demand records how QX changes (in percentage terms) given a percentage change in PX.On a typical demand curve, P and Q move oppositely: eQ,P will be negative.For example, if eQ,P = -2, a 1 percent increase in price leads to a 2 percent decrease in quantity demanded.
![Page 18: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/18.jpg)
Terminology
![Page 19: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/19.jpg)
Substitutes
Time
Total Expenditures
![Page 20: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/20.jpg)
Mathematica
![Page 21: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/21.jpg)
Price Elasticity and Total Expenditures
Suppose price elasticity of demand = -2.Initially people buy 1 million cars at €10,000 each - total expenditure of €10 billion.10% price increase to €11,000 would cause a 20 percent decline in cars purchased to 800,000 vehicles.Total expenditures after price increase would be only €8.8 billion
![Page 22: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/22.jpg)
Relationship between Price Changes and Changes in Total Expenditure
![Page 23: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/23.jpg)
Linear Demand Curves and Price Elasticity
Price elasticity of demand changes continuously along linear demand curves.
Demand elastic at prices above midpoint price.Demand unit elastic at midpoint price.Demand inelastic at prices below midpoint price.
![Page 24: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/24.jpg)
Numerical Example: Elasticity along Linear Demand Curve
• Assume a straight-line demand curve for iPod players is Q = 100 - 2P
where Q is the quantity of players demanded per week and P is their price.
• Figure 4-4 shows this demand curve; Table 4-3 shows several price-quantity combinations.
![Page 25: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/25.jpg)
Price(euros)
10
50
40
3025
20
Quantity of players per week
Demand
20 4050 60 80 1000
Elasticity Varies along a Linear Demand Curve
![Page 26: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/26.jpg)
![Page 27: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/27.jpg)
As Gas Costs Soar, Buyers Flock to Small Cars
Farmers in India buy more camels
Gas Prices Send Surge of Riders to Mass Transit
Gas prices knock bicycle sales, repairs into higher gear
High gas prices drive farmer to switch to mules
Home buying practices adjust to high gas prices
![Page 28: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/28.jpg)
As Gas Prices Climb, So Do Scooter Sales
Gas Prices Drive Students to Online Courses
...demand for new, more fuel-efficient aircraft has never been greater.
"For every 10 percent rise in gas prices, fatalities are reduced by 2.3 percent”
![Page 29: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/29.jpg)
Fuel prices have grounded an unexpected frequent-flyer: Sean "Diddy" Combs.
![Page 30: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/30.jpg)
Aww...
![Page 31: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/31.jpg)
SurveyGo to stephenkinsella.net
Tell me what you think
![Page 32: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/32.jpg)
Next Time• Try exercises 4.4, 4.5, 4.1
32
![Page 33: Ec4004 2008 Lecture 4](https://reader033.vdocuments.net/reader033/viewer/2022051609/54723ac0b4af9fb90a8b4e96/html5/thumbnails/33.jpg)
Elasticity&
Market DemandDr. Stephen KinsellaEC4004 Lecture 4