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Business economics lecture_3
 

Business economics lecture_3

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    Business economics lecture_3 Business economics lecture_3 Presentation Transcript

    • Business Economics (ECO 341) Fall Semester, 2012 Khurrum S. Mughal 1
    •  Price Elasticity of Demand  Price Elasticity of Supply  Uses of Elasticities Theme of the Lecture 2
    •  How are price and demand related for a good? (law of demand)  Consumer Demand Theory Qd= f(Px, I, Py,T)  Assuming everything else fixed……………. Individual Demand 3
    •  Demand function faced by a firm QD= a0+a1Px +a2I+a3N+a4Py+ a5T……………  “a” is coefficient to be estimated with regression analysis Demand Faced by A Firm 4
    •  Measures responsiveness to changes in quantity demanded due to changes in price  Percentage change in quantity due to percentage change in price  Different effects of reducing price  Types:  Point Price Elasticity of Demand  Arc Price Elasticity of Demand Price Elasticity of Demand 5
    •  Graphical Representation  Different at different points  Given by coefficient “a” with Price in the regression equation Point Price Elasticity of Demand 6
    •  Graphical Representation  Used since Point price elasticity differs in scenarios of price rise and fall  Calculated by average of change in quantity and price  In general: the price elasticity of demand for a firm is higher than the price elasticity of market demand Arc Price Elasticity of Demand 7
    • Price Elasticity of Demand 8 Quantity Supplied and Demanded Price Ed > 1 Ed < 1 Ed = 1
    • Polar Extreme Cases of Price Elasticity of Demand 9 Quantity Supplied and Demanded Price Perfectly Inelastic Demand Perfectly Elastic Demand
    • Price Elasticity, Total Revenue 10 P ($) Q Ep TR=P.Q 6 0 -∞ 0 5 100 -5 500 4 200 -2 800 3 300 -1 900 2 400 -0.5 800 1 500 -0.2 500 0 600 0 0
    •  Effect of decrease in price on Total revenue:  Increases if demand is elastic  Remains Unchanged if Unitary elastic  Decreases if Inelastic  Graphical Representation: Price Elasticity, Total Revenue 11
    •  Availability of Substitutes  Example: Sugar vs Salt  Larger for longer time periods  Example: Petrol vs CNG Factors Effecting Price Elasticity of Demand 12
    •  Price Elasticity of Demand  Price Elasticity of Supply  Uses of Elasticities Theme of the Lecture 13
    •  The quantity sellers are willing to sell at a given price level  Depends on:  Price of the commodity  Prices of inputs  Technology  Opportunity cost  Future expectations  Number of sellers Supply of a Commodity 14
    •  The higher the price, greater is the quantity sellers are willing to sell in the market (law of supply)  Assuming everything else is fixed……… Individual Supply 15
    •  Measures responsiveness to changes in quantity supplied due to changes in price  Percentage change in quantity due to percentage change in price  Factors Effecting elasticity of supply  Ability to increase production  Time Period Price Elasticity of Supply 16
    • Polar Extreme Cases of Price Elasticity of Supply 17 Perfectly Inelastic Supply Perfectly Elastic Supply Quantity Supplied and Demanded Price Quantity Supplied and Demanded Price Initial Demand New Demand Initial Demand New Demand