Mankiw 7e ch. 5 part 1

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  • The elasticity chapter in most principles textbooks is fairly technical, and is not always students’ favorite. This PowerPoint chapter contains several special features designed to engage and motivate students to learn this important material.

    First, we consider a scenario in which students face a business decision—whether to raise the price of a service they sell. This scenario is used to illustrate the effects of raising price on number of units sold and on revenue, which students immediately recognize as critical to the business decision.

    Second, instead of merely listing the determinants of elasticity, students are asked to think about some concrete examples and deduce from each one a lesson about the determinants of elasticity.

    Third, instead of putting the applications at the end of the chapter (as in the textbook), this PowerPoint includes one of them immediately after the section on price elasticity of demand. This helps break up what would otherwise be a long stretch of theory.

    Please be assured that this PowerPoint presentation is, nonetheless, very consistent with the textbook’s approach.

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  • Mankiw 7e ch. 5 part 1

    1. 1. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Seventh Edition Microeconomics Principles of N. Gregory Mankiw CHAPTER 5 Elasticity and its Application Part 1 WojciechGerson(1831-1901)
    2. 2. Imagine you design websites for local businesses. You charge $200 per website, and currently sell 12 websites per month. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to $250. What do you think is going to happen to your revenue? Why? A scenario… 2Elasticity | Part 1
    3. 3. What determines price elasticity? To learn the determinants of price elasticity, we look at a series of examples. Each compares two common goods. In each example: • Suppose the prices of both goods rise by 20%. • The good with the more elastic demand is the good for which Qd (the Quantity demanded – or more simply, the amount sold) falls the most (in percent). • What lesson does the example teach us about what determines how price elastic (or responsive) demand for a good is?
    4. 4. EXAMPLE 1 | Breakfast Cereal vs. Sunscreen • The prices of both of these goods rise by 20%. For which good does Qd drop the most? Why? • Breakfast cereal has close substitutes (e.g., pancakes, Eggo waffles, leftover pizza), so buyers can easily switch if the price rises. • Sunscreen has no close substitutes, so a price increase would not affect demand very much. • Lesson: Price elasticity is higher when close substitutes are available.
    5. 5. EXAMPLE 2 | “Blue Jeans” vs. “Clothing” • The prices of both goods rise by 20%. For which good does Qd drop the most? Why? • For a narrowly defined good such as blue jeans, there are many substitutes (khakis, shorts, Speedos). • There are fewer substitutes available for broadly defined goods. (Are there any substitutes for clothing?) • Lesson: Price elasticity is higher for narrowly defined goods than for broadly defined ones.
    6. 6. EXAMPLE 3 |Insulin vs. Caribbean Cruises • The prices of both of these goods rise by 20%. For which good does Qd drop the most? Why? • To millions of diabetics, insulin is a necessity. A rise in its price would cause little or no decrease in demand. • A cruise is a luxury. If the price rises, some people will forego it. • Lesson: Price elasticity is higher for luxuries than for necessities.
    7. 7. Think about this… • The price of gasoline rises 20%. Does Qd drop more in the short run or the long run? Why? • There’s not much people can do in the short run, other than ride the bus or carpool. • In the long run, people can buy smaller cars or live closer to work. • Lesson: Price elasticity is higher in the long run than the short run.
    8. 8. The Determinants of Price Elasticity: A Summary The price elasticity of demand depends on: • (B) how broadly or narrowly the good is defined • (A) the extent to which close substitutes are available (alternatives) • (L) whether the good is a necessity or a luxury • (L) the time horizon—elasticity is higher in the long run than the short run
    9. 9. Elasticity |Graphically (a) The flatter the curve, the bigger the elasticity (as price rises, demand drops a lot) (b) The steeper the curve, the smaller the elasticity. P Q P Q (a) (b) The price elasticity of demand is closely related to the slope of the demand curve.
    10. 10. Elasticity | How consumers respond to price changes KEY POINT How much consumers respond to a price increase depends on the characteristics of the good. In particular, the 4 characteristics in the acronym B-A-L-L. Test Prep Question | Do you think your price increase is likely to scare a lot of your customers away or not? Answer this question in the following way: (1) Describe the demand for the website services you sell in terms of each of the determinants of elasticity (B-A-L-L). (2) Identify whether each determinant(s) tends to make demand elastic or inelastic. (3) Conclude whether the demand for your product is likely to more elastic or inelastic. Elasticity | Part 1 10 Whenever you see a Test Prep Question, you can click on it to enter your answers [the questions will be repeated]. After you submit your answer, you will see the correct answer and can revise your answer to get more practice.
    11. 11. Good work! See you in the next presentation!

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