2. Price
Income
Prices of related goods
Taste and preferences
Customs and traditions
Government policy
Advertising
Population
Location
Service
Quality
3. A decrease in the price of a good, all other
things held constant, will cause an increase in
the quantity demanded of the good and
an increase in the price of a good will cause a
decrease in the quantity demanded of the
good.
10. Elasticity is a measure of responsiveness of
one variable to another variable.
Can involve any two variables.
An elastic relationship is responsive.
An inelastic relationship is unresponsive.
11. Price Elasticity of demand
Income elasticity of demand
Cross Elasticity of demand
Promotional Elasticity of demand
12. Εp=%∆Q/%∆P
An elastic response is one where numerator is
greater than denominator.
i.e., %∆Q>%∆P so Ep >1
An inelastic response is one where numerator is
smaller than denominator.
i.e., %∆Q<%∆P so Ep <1
13. Perfectly Elastic D
Ep =infinite
Perfectly Inelastic D
P
Q
P
Q
Ep =0
D
D
15. Point elasticity
Point elasticity is
responsiveness at a point
along the demand
function
Ep =∆Q/Q1
∆P/P1
simplifying:
Ep =(∆Q/∆ P)* P1/Q1
Price (Rs.)
Q
Q1
P1
D
16. Point elasticity
Point elasticity is
responsiveness at a
point along the demand
function
Ep =∆Q/Q1
∆P/P1
simplifying:
Ep =(∆Q/∆ P)* P1/Q1
Price (Rs.)
Q
Q1
P1
D
17. Point elasticity
Ep =(∆Q/∆ P)* P1/Q1
SupposeP=17000
Q=56-0.002*17000
Q=56-34=22
Plug into equation gives:
Ep =(-0.002)* 17000/22
Ep =-34/22=-1.54
Price (Rs)
Q
22
17k
D
18. Arc elasticity is simply an average
elasticity along a range of the
demand curve.
19. The end-point problem – the
percentage change differs
depending on whether you view the
change as a rise or a decline in price.
20. Arc elasticity:
Responsiveness along a range of D.
function
Ep =∆Q/((Q1+Q2)/2)
∆P/((P1+P2)/2)
simplifying:
Ep=(∆Q/∆P)*((P1+P2)/(Q1+Q2))
Price ($)
Q
Q2
P2
P1
Q1
Avg.
responsiveness
D
21. Arc elasticity
Ep =(∆Q/∆P)*((P1+P2)/(Q1+Q2))
Look atP range 16k - 17k
Q=56-0.002*17000
Q=56-34=22
Plug into equation gives:
Ep =(-0.002)*(33000/46)
Ep =-66/46=-1.43
Price ($)
Q22
17k
D
24
16k
22. Nature of commodity
Availability of substitute
Multiplicity of uses
Habit
Proportion of income spent
Price range
34. Rate of change in demand for a commodity
due to a change in promotion expenditure
35. For many crops, a strange situation
arises a bad crop year results in a good
year for farm incomes, and a good crop
year results in a bad year for farm
incomes.
How can this happen to farm community?
36. Price elasticity gives us the answer:
Bad crop year: supply decreases, prices for farm products
rise, but quantity demanded doesn’t fall very much. The
quantity demanded of farm products is not very
responsive to changes in prices
Good crop year: supply increases, prices for farm products
fall, but quantity demanded doesn’t increase very much.
The quantity demanded of farm products is not very
responsive to changes in prices
It is easy to show this with a graph. But first we need yet
another concept: Total Revenue = Price x Quantity
37. TR = P x Q
If P goes down Q goes up, but what happens
to TR?
If P goes up Q goes down, but what happens
to TR?
Elasticity can answer the question….
38. During bad crop years, prices rise and
quantity falls (but not that much) so total
revenue to farmers goes up.
During good crop years, prices fall and
quantity increases (but not that much) so
total revenue to farmers goes down.
The graphs….
45. Price
Input Price
Technology
Government
regulations and taxes
Number of firms
Substitutes in
production
Producer expectations
46. An equation representing the supply curve:
Qx
S
= f(Px ,PR ,W, H,)
Qx
S
= quantity supplied of good X.
Px = price of good X.
PR = price of a related good
W = price of inputs (e.g., wages)
H = other variable affecting supply
47. A decrease in the price of a good, all other
things held constant, will cause a decrease in
the quantity supplied of the good and an
increase in the price of a good will cause an
increase in the quantity supplied of the good.
56. Higher demand leads to
higher equilibrium price and
higher equilibrium quantity.
Higher supply leads to lower
equilibrium price and higher
equilibrium quantity.
57. Lower demand leads to
lower price and lower
quantity exchanged.
Lower supply leads to
higher price and lower
quantity exchanged.
58. • The relative magnitudes of change in supply and demand determine theThe relative magnitudes of change in supply and demand determine the
outcome of market equilibrium.outcome of market equilibrium.
59. • When supply and demand both increase, quantity will increase, butWhen supply and demand both increase, quantity will increase, but
price may go up or down.price may go up or down.
60. Price Ceilings
The maximum legal price that can be charged.
Examples:
▪ Rent control Act.
▪ Proposed restrictions on ATM fees.
Price Floors
The minimum legal price that can be charged.
Examples:
▪ Minimum wage.
▪ Agricultural price supports.
2-60
62. The dollar amount paid to a firm under a price
ceiling, plus the nonpecuniary price.
PF
= Pc
+ (PF
- PC
)
PF
= full economic price
PC
= price ceiling
PF
- PC
= nonpecuniary price
2-62
63. Ceiling price of gasoline: $1.
3 hours in line to buy 15 gallons of gasoline
Opportunity cost: $5/hr.
Total value of time spent in line: 3 × $5 = $15.
Non-pecuniary price per gallon: $15/15=$1.
Full economic price of a gallon of gasoline: $1+
$1=2.
2-63
64. For example, ceiling price of apartments: PFor example, ceiling price of apartments: PCeilingCeiling
= Rs.4,800 per= Rs.4,800 per
month.month.
Apartment seekers in Bangalore often require the services ofApartment seekers in Bangalore often require the services of
a real estate agent or apartment broker to assist them ina real estate agent or apartment broker to assist them in
securing an apartment lease. Typical broker fees are onesecuring an apartment lease. Typical broker fees are one
month's rent.month's rent.
For example, suppose you stay for 4 years, or 48 months.For example, suppose you stay for 4 years, or 48 months.
• Non-pecuniary price per month: Rs.4,800/48 = Rs.100 perNon-pecuniary price per month: Rs.4,800/48 = Rs.100 per
month.month.
Full economic price of apartments: PFull economic price of apartments: Pfullfull
= Rs(4,800+100) == Rs(4,800+100) =
Rs.4,900.Rs.4,900.
66. Full Economic Price
The dollar amount paid to a supplier under a price floor,
minus the non-pecuniary (non-money) price suppliers
loose through their competition to sell the goods.
The Full Price falls unless the government supports the
price floor.
Minimum wages.
PFloor
= price ceiling
PFull
= PFloor
+ (PFull
- PFloor
)
PFull
= full economic price
PFull
- PFloor
= non-pecuniary price
67. For example, floor price of labor in California: PFor example, floor price of labor in California: PFloorFloor
= $8 per= $8 per
hour.hour.
For example, $5 per hour is wasted to get the $8 per hour job.For example, $5 per hour is wasted to get the $8 per hour job.
Dressing for success to work at McDonalds.Dressing for success to work at McDonalds.
Being agreeable or attractive to your boss.Being agreeable or attractive to your boss.
Showing up early and staying late, off the clock.Showing up early and staying late, off the clock.
Full economic price of an hour of labor: PFull economic price of an hour of labor: PFullFull
= $(8–5) = $3 per= $(8–5) = $3 per
hour.hour.
68. Demand and supply functions for a product
are:
Qd = 10,000 – 4P
Qs = 2,000 + 6P
If the government imposes a sales tax of
Rs.100 per unit, what will be the new
equilibrium price?
69. The supply and demand function for a
product is as follows:
Qd = 6,000 – 3P
Qs = 3,000 + 4.5P
The Government imposes a excise duty of
Rs.20 per unit. What is the proportion of tax
that is borne by the producer ?