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- 1. Measurement and Interpretation of Elasticities Chapter 5
- 2. Discussion Topics <ul><li>Own price elasticity of demand </li></ul><ul><li>Income elasticity of demand </li></ul><ul><li>Cross price elasticity of demand </li></ul><ul><li>Other general properties </li></ul><ul><li>Applicability of demand elasticities </li></ul>
- 3. Key Concepts Covered… <ul><li>Own price elasticity </li></ul><ul><li>Income elasticity </li></ul><ul><li>Cross price elasticity </li></ul>Pages 70-76
- 4. What is Elasticity of Demand? <ul><li>We define elasticity of demand as responsiveness of the quantity demanded to a change in the price. </li></ul><ul><ul><li>Degree of responsiveness is measured by an elasticity coefficient — frequently called elasticities . </li></ul></ul><ul><li>Invented by the British Economist Alfred Marshall </li></ul>
- 5. Key Concepts Covered… <ul><li>Own price elasticity = </li></ul><ul><ul><li>% Q beef for a given % P beef </li></ul></ul><ul><li>Income elasticity = </li></ul><ul><ul><li>% Q beef for a given % Income </li></ul></ul><ul><li>Cross price elasticity = </li></ul><ul><ul><li>% Q beef for a given % P chicken </li></ul></ul>Pages 70-76
- 6. Key Concepts Covered… <ul><li>Arc elasticity = range along the demand curve </li></ul><ul><li>Point elasticity = point on the demand curve </li></ul>Pages 70-76
- 7. Key Concepts Covered… <ul><li>Own price elasticity = % Q beef for a given % P beef </li></ul><ul><li>Income elasticity = % Q beef for a given % Income </li></ul><ul><li>Cross price elasticity = % Q beef for a given % P chicken </li></ul><ul><li>Arc elasticity = range along the demand curve </li></ul><ul><li>Point elasticity = point on the demand curve </li></ul><ul><li>Price flexibility = reciprocal of own price elasticity </li></ul>Pages 70-76
- 8. Own Price Elasticity of Demand
- 9. Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Point Elasticity Approach Pages 70-72
- 10. Own Price Elasticity of Demand Point elasticity: = [ Q P] × [P a Q a ] Own price elasticity of demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Q = (Q a – Q b ); and P = (P a – P b ) The subscript “a” here stands for “after” while “b” stands for “before” Pages 70-72
- 11. Own Price Elasticity of Demand Point elasticity: = [ Q P] × [P a Q a ] Own price elasticity of demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Q = (Q a – Q b ); and P = (P a – P b ) The subscript “a” here stands for “after” while “b” stands for “before” Single point on curve P a Q a Pages 70-72
- 12. Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Page 72 Arc Elasticity Approach
- 13. Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = where: P = (P a + P b ) 2; Q = (Q a + Q b ) 2; Q = (Q a – Q b ); and P = (P a – P b ) Arc elasticity Own price elasticity of demand = [ Q P] x [P Q] The subscript “a” here again stands for “after” while “b” stands for “before” Equation 5.3 Page 72
- 14. Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = where: P = (P a + P b ) 2; Q = (Q a + Q b ) 2; Q = (Q a – Q b ); and P = (P a – P b ) Arc elasticity Own price elasticity of demand = [ Q P] x [P Q] The subscript “a” here again stands for “after” while “b” stands for “before” The “bar” over the P and Q variables indicates an average or mean. Page 72
- 15. Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = where: P = (P a + P b ) 2; Q = (Q a + Q b ) 2; Q = (Q a – Q b ); and P = (P a – P b ) Arc elasticity Own price elasticity of demand = [ Q P] x [P Q] The subscript “a” here again stands for “after” while “b” stands for “before” Specific range on curve P b P a Q b Q a Page 72
- 16. Interpreting the Own Price Elasticity of Demand Page 72 If elasticity coefficient is: Demand is said to be: % in quantity is: Greater than 1.0 Elastic Greater than % in price Equal to 1.0 Unitary elastic Same as % in price Less than 1.0 Inelastic Less than % in price
- 17. Demand Curves Come in a Variety of Shapes
- 18. Demand Curves Come in a Variety of Shapes Perfectly inelastic Perfectly elastic Page 72
- 19. Demand Curves Come in a Variety of Shapes Inelastic Elastic
- 20. Demand Curves Come in a Variety of Shapes Inelastic where % Q < % P Elastic where % Q > % P Page 73 Unitary Elastic where % Q = % P
- 21. <ul><li>Demand curves often exhibit all three ranges of elasticity in a single curve. </li></ul><ul><ul><li>Always true when a demand curve is a straight line. </li></ul></ul>Straight line demand curves are elastic with respect to price at relatively high prices, and inelastic at relatively low prices.
- 22. Page 73 Example of arc own-price elasticity of demand Unitary elasticity…a one for one exchange
- 23. Page 73 Inelastic demand Elastic demand
- 24. P b P a Q b Q a Price Quantity Elastic Demand Curve 0 Cut in price Brings about a larger increase in the quantity demanded c
- 25. P b P a Q b Q a Price Quantity Elastic Demand Curve What happened to producer revenue? What happened to consumer surplus? 0 c
- 26. P b P a Q b Q a Price Quantity Elastic Demand Curve Producer revenue increases since % P is less that % Q. Revenue before the change was 0P b aQ b . Revenue after the change was 0P a bQ a . a b 0 c
- 27. P b P a Q b Q a Price Quantity Elastic Demand Curve Producer revenue increases since % P is less that % Q. Revenue before the change was 0P b aQ b . Revenue after the change was 0P a bQ a . a b 0 c
- 28. P b P a Q b Q a Price Quantity Elastic Demand Curve Producer revenue increases since % P is less that % Q. Revenue before the change was 0P b aQ b . Revenue after the change was 0P a bQ a . a b 0 c
- 29. Revenue Implications Page 81 Own-price elasticity is: Cutting the price will: Increasing the price will: Elastic Increase revenue Decrease revenue Unitary elastic Not change revenue Not change revenue Inelastic Decrease revenue Increase revenue
- 30. P b P a Q b Q a Price Quantity Elastic Demand Curve Consumer surplus before the price cut was area P b ca. a b 0 c
- 31. P b P a Q b Q a Price Quantity Elastic Demand Curve Consumer surplus after the price cut is Area P a cb. a b 0 c
- 32. P b P a Q b Q a Price Quantity Elastic Demand Curve So the gain in consumer surplus after the price cut is area P a P b ab. a b 0 c
- 33. P b P a Q b Q a Price Quantity Inelastic Demand Curve Cut in price Brings about a smaller increase in the quantity demanded
- 34. P b P a Q b Q a Price Quantity Inelastic Demand Curve What happened to producer revenue? What happened to consumer surplus?
- 35. P b P a Q b Q a Price Quantity Inelastic Demand Curve Producer revenue falls since % P is greater than % Q. Revenue before the change was 0P b aQ b . Revenue after the change was 0P a bQ a . a b 0
- 36. P b P a Q b Q a Price Quantity Inelastic Demand Curve Producer revenue falls since % P is greater than % Q. Revenue before the change was 0P b aQ b . Revenue after the change was 0P a bQ a . a b 0
- 37. P b P a Q b Q a Price Quantity Inelastic Demand Curve Consumer surplus increased by area P a P b ab a b 0
- 38. Revenue Implications Characteristic of agriculture Page 81 Own-price elasticity is: Cutting the price will: Increasing the price will: Elastic Increase revenue Decrease revenue Unitary elastic Not change revenue Not change revenue Inelastic Decrease revenue Increase revenue
- 39. Retail Own Price Elasticities <ul><li>Beef and veal= .6166 </li></ul><ul><li>Milk = .2588 </li></ul><ul><li>Wheat = .1092 </li></ul><ul><li>Rice = .1467 </li></ul><ul><li>Carrots = .0388 </li></ul><ul><li>Non food = .9875 </li></ul>Page 79
- 40. Interpretation Let’s take rice as an example, which has an own price elasticity of - 0.1467. This suggests that if the price of rice drops by 10%, for example, the quantity of rice demanded will only increase by 1.467%. P Q 10% drop 1.467% increase Rice producer Revenue? Consumer surplus?
- 41. Example <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30. If the Chicken increases the price of the platter by 50 cents: </li></ul><ul><li>How many platters will the chicken sell?__________ </li></ul><ul><li>b. The Chicken’s revenue will change by $__________ </li></ul><ul><li>c. Consumers will be ____________ off as a result of this price change. </li></ul>
- 42. The answer… <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30 . If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__ 1,440 ____ </li></ul><ul><li>Solution: </li></ul><ul><li>-0.30 = % Q % P </li></ul><ul><li>-0.30= % Q [($4.00-$3.50) (($4.00+$3.50) 2)] </li></ul><ul><li>-0.30= % Q [$0.50 $3.75] </li></ul><ul><li>-0.30= % Q 0.1333 </li></ul><ul><li>% Q=(-0.30 × 0.1333) = -0.04 or –4% </li></ul><ul><li>So new quantity is 1,440, or (1-.04) ×1,500, </li></ul><ul><li>or .96 ×1,500 </li></ul>
- 43. The answer… <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30 . If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__ 1,440 ____ </li></ul><ul><li>b. The Chicken’s revenue will change by $__ +$510 ___ </li></ul><ul><li>Solution: </li></ul><ul><li>Current revenue = 1,500 × $3.50 = $5,250 per month </li></ul><ul><li>New revenue = 1,440 × $4.00 = $5,760 per month </li></ul><ul><li>So revenue increases by $510 per month, or $5,760 </li></ul><ul><li>minus $5,250 </li></ul>
- 44. The answer… <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30. If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__ 1,440 ____ </li></ul><ul><li>b. The Chicken’s revenue will change by $__ +$510 ___ </li></ul><ul><li>Consumers will be __ worse ___ off as a result of this price change. </li></ul><ul><li>Why? Because price increased. </li></ul>
- 45. Another Example <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30 . If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__________ </li></ul><ul><li>b. The Chicken’s revenue will change by $__________ </li></ul><ul><li>c. Consumers will be ____________ off as a result of this price change. </li></ul>
- 46. The answer… <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30 . If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__ 1,240 ____ </li></ul><ul><li>Solution: </li></ul><ul><li>-1.30 = % Q % P </li></ul><ul><li>-1.30= % Q [($4.00-$3.50) (($4.00+$3.50) 2)] </li></ul><ul><li>-1.30= % Q [$0.50 $3.75] </li></ul><ul><li>-1.30= % Q 0.1333 </li></ul><ul><li>% Q=(-1.30 × 0.1333) = -0.1733 or –17.33% </li></ul><ul><li>So new quantity is 1,240, or (1-.1733) ×1,500, </li></ul><ul><li>or .8267 ×1,500 </li></ul>
- 47. The answer… <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30 . If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__ 1,240 ____ </li></ul><ul><li>b. The Chicken’s revenue will change by $__ - $290 ___ </li></ul><ul><li>Solution: </li></ul><ul><li>Current revenue = 1,500 × $3.50 = $5,250 per month </li></ul><ul><li>New revenue = 1,240 × $4.00 = $4,960 per month </li></ul><ul><li>So revenue decreases by $290 per month, </li></ul><ul><li>or $4,960 minus $5,250 </li></ul>
- 48. The answer… <ul><li>1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30. If the Chicken increases the price of the platter by 50 cents : </li></ul><ul><li>How many platters will the chicken sell?__ 1,240 ____ </li></ul><ul><li>b. The Chicken’s revenue will change by $__ - $290 ___ </li></ul><ul><li>Consumers will be __ worse ___ off as a result of this price change. </li></ul><ul><li>Why? Because the price increased. </li></ul>
- 49. Income Elasticity of Demand
- 50. Income Elasticity of Demand Income elasticity of demand Percentage change in quantity Percentage change in income = where: I = (I a + I b ) 2 Q = (Q a + Q b ) 2 Q = (Q a – Q b ) I = (I a – I b ) = [ Q I] x [I Q] Page 74-75 Indicates potential changes or shifts in the demand curve as consumer income (I) changes….
- 51. Interpreting the Income Elasticity of Demand Page 75 If the income elasticity is equal to: The good is classified as: Greater than 1.0 A luxury and a normal good Less than 1.0 but greater than 0.0 A necessity and a normal good Less than 0.0 An inferior good!
- 52. Some Examples Elastic Page 79 Commodity Own Price elasticity Income elasticity Beef and veal -0.6166 0.4549 Chicken -0.5308 .3645 Cheese -0.3319 0.5927 Rice -0.1467 -0.3664 Lettuce -0.1371 0.2344 Tomatoes -0.5584 0.4619 Fruit juice -0.5612 1.1254 Grapes -1.3780 0.4407 Nonfood items -0.9875 1.1773
- 53. Some Examples Inferior good Elastic Page 79 Commodity Own Price elasticity Income elasticity Beef -0.6166 0.4549 Chicken -0.5308 .3645 Cheese -0.3319 0.5927 Rice -0.1467 -0.3664 Lettuce -0.1371 0.2344 Tomatoes -0.5584 0.4619 Fruit juice -0.5612 1.1254 Grapes -1.3780 0.4407 Nonfood items -0.9875 1.1773
- 54. Some Examples Inferior good Luxury good Elastic Page 79 Commodity Own Price elasticity Income elasticity Beef -0.6166 0.4549 Chicken -0.5308 .3645 Cheese -0.3319 0.5927 Rice -0.1467 -0.3664 Lettuce -0.1371 0.2344 Tomatoes -0.5584 0.4619 Fruit juice -0.5612 1.1254 Grapes -1.3780 0.4407 Nonfood items -0.9875 1.1773
- 55. Example <ul><li>Assume the government cuts taxes, thereby increasing disposable income by 5%. The income elasticity for chicken is .3645. </li></ul><ul><li>What impact would this tax cut have upon the demand for chicken? </li></ul><ul><li>Is chicken a normal good or an inferior good? Why? </li></ul>
- 56. The Answer <ul><li>1. Assume the government cuts taxes, thereby increasing disposable income (I) by 5%. The income elasticity for chicken is .3645 . </li></ul><ul><li>What impact would this tax cut have upon the demand for chicken? </li></ul><ul><li>Solution: </li></ul><ul><li>.3645 = % Q Chicken % I </li></ul><ul><li>.3654 = % Q Chicken .05 </li></ul><ul><li> % Q Chicken = .3645 .05 = .018 or + 1.8% </li></ul>
- 57. The Answer <ul><li>1. Assume the government cuts taxes, thereby increasing disposable income by 5%. The income elasticity for chicken is .3645. </li></ul><ul><li>What impact would this tax cut have upon the demand for chicken? _____ + 1.8% ___ </li></ul><ul><li>Is chicken a normal good or an inferior good? Why? </li></ul><ul><li>Chicken is a normal good but not a luxury since the income elasticity is > 0 but < 1.0 </li></ul>
- 58. Cross Price Elasticity of Demand
- 59. Cross Price Elasticity of Demand Cross Price elasticity of demand Percentage change in quantity Percentage change in another price = where: P T = (P Ta + P Tb ) 2 Q H = (Q Ha + Q Hb ) 2 Q H = (Q Ha – Q Hb ) P T = (P Ta – P Tb ) = [ Q H P T ] × [P T Q H ] Page 75 Indicates potential changes or shifts in the demand curve as the price of other goods change…
- 60. Interpreting the Cross Price Elasticity of Demand Page 76 If the cross price elasticity is equal to: The good is classified as: Positive Substitutes Negative Complements Zero Independent
- 61. Some Examples Values in red along the diagonal are own price elasticities… Page 80 Item Prego Ragu Hunt’s Prego -2.5502 .8103 .3918 Ragu .5100 -2.0610 .1381 Hunt’s 1.0293 .5349 -2.7541
- 62. Some Examples Values off the diagonal are all positive , indicating these products are substitutes as prices change… Page 80 Item Prego Ragu Hunt’s Prego -2.5502 .8103 .3918 Ragu .5100 -2.0610 .1381 Hunt’s 1.0293 .5349 -2.7541
- 63. Some Examples An increase in the price of Ragu Spaghetti Sauce has a bigger impact on Hunt’s Spaghetti Sauce than vice versa. Page 80 Item Prego Ragu Hunt’s Prego -2.5502 .8103 .3918 Ragu .5100 -2.0610 .1381 Hunt’s 1.0293 .5349 -2.7541
- 64. Some Examples Page 80 A 10% increase in the price of Ragu Spaghetti Sauce increases the demand for Hunt’s Spaghetti Sauce by 5.349%….. Item Prego Ragu Hunt’s Prego -2.5502 .8103 .3918 Ragu .5100 -2.0610 .1381 Hunt’s 1.0293 .5349 -2.7541
- 65. Some Examples Page 80 But…a 10% increase in the price of Hunt’s Spaghetti Sauce increases the demand for Ragu Spaghetti Sauce by only 1.381%….. Item Prego Ragu Hunt’s Prego -2.5502 .8103 .3918 Ragu .5100 -2.0610 .1381 Hunt’s 1.0293 .5349 -2.7541
- 66. Example <ul><li>1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60. </li></ul><ul><li>If the price of hamburger buns rises by 5 percent, what impact will that have on hamburger consumption? </li></ul><ul><li>What is the demand relationship between these products? </li></ul>
- 67. The Answer <ul><li>1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60. </li></ul><ul><li>If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ____ - 3% ______ </li></ul><ul><li>Solution: </li></ul><ul><li>-.60 = % Q H % P HB </li></ul><ul><li>-.60 = % Q H .05 </li></ul><ul><li> % Q H = .05 (-.60) = -.03 or – 3% </li></ul>
- 68. The Answer <ul><li>1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60. </li></ul><ul><li>If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ___ - 3% _____ </li></ul><ul><li>What is the demand relationship between these products? </li></ul>
- 69. The Answer <ul><li>1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60. </li></ul><ul><li>If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ___ - 3% _____ </li></ul><ul><li>What is the demand relationship between these products? </li></ul><ul><li>These two products are complements as evidenced by the negative sign on this cross price elasticity. </li></ul>
- 70. Another Example <ul><li>2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross price elasticity for Pepsi with respect to the price of Coca Cola is 0.70. </li></ul><ul><li>If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? </li></ul><ul><li>b. What is the demand relationship between these products? </li></ul>
- 71. The Answer <ul><li>2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross price elasticity for Pepsi with respect to the price of Coca Cola is 0.70. </li></ul><ul><li>If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? </li></ul><ul><li>Solution: </li></ul><ul><li>.70 = % Q Pepsi % P Coke </li></ul><ul><li>.70 = % Q Pepsi .05 = .035 or 3.5% </li></ul><ul><li>New quantity sold = 1,000 1.035 = 1,035 </li></ul><ul><li>New value of sales = 1,035 $3.00 = $3,105 </li></ul>
- 72. The Answer <ul><li>2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross price elasticity for Pepsi with respect to the price of Coca Cola is 0.70. </li></ul><ul><li>If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? __ 35 six-packs or $105 per day __ </li></ul><ul><li>What is the demand relationship between these products? </li></ul>
- 73. The Answer <ul><li>2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross price elasticity for Pepsi with respect to the price of Coca Cola is 0.70. </li></ul><ul><li>If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? __ 35 six-packs or $105 per day __ </li></ul><ul><li>What is the demand relationship between these products? </li></ul><ul><li>The products are substitutes as evidenced by the positive sign on this cross price elasticity! </li></ul>
- 74. Price Flexibility of Demand
- 75. Price Flexibility We earlier said that the price flexibility is the reciprocal of the own-price elasticity. If the calculated elasticty is - 0.25, then the flexibility would be - 4.0 .
- 76. Price Flexibility We earlier said that the price flexibility is the reciprocal of the own-price elasticity. If the calculated elasticty is - 0.25, then the flexibility would be - 4.0 . This is a useful concept to producers when forming expectations for the current year. If the USDA projects an additional 2% of supply will likely come on the market, then producers know the price will likely drop by 8%, or: % Price = - 4.0 x % Quantity = - 4.0 x (+2%) = - 8% If supply increases by 2%, price would fall by 8%!
- 77. Price Flexibility We earlier said that the price flexibility is the reciprocal of the own-price elasticity. If the calculated elasticty is - 0.25, then the flexibility would be - 4.0 . This is a useful concept to producers when forming expectations for the current year. If the USDA projects an additional 2% of supply will likely come on the market, then producers know the price will likely drop by 8%, or: % Price = - 4.0 x % Quantity = - 4.0 x (+2%) = - 8% If supply increases by 2%, price would fall by 8%! Note : make sure you use the negative sign for both the elasticity and the flexibility.
- 78. Revenue Implications Characteristic of agriculture Page 81 Own-price elasticity is: Increase in supply will: Decrease in supply will: Elastic Increase revenue Decrease revenue Unitary elastic Not change revenue Not change revenue Inelastic Decrease revenue Increase revenue
- 79. Short run effects Long run effects Over time, consumers respond in greater numbers. This is referred to as a recognition lag… Page 77 Changing Price Response Over Time
- 80. P b P a Q b Q a Price Quantity Ag’s Inelastic Demand Curve A small increase in supply will cause the price of Ag products to fall sharply. This explains why major program crops receive Subsidies from the federal government. a b 0 Increase in supply
- 81. P b P a Q b Q a Price Quantity Inelastic Demand Curve While this increases the costs of government programs and hence budget deficits, remember consumers benefit from cheaper food costs. a b 0 P b P a Q b Q a Price a b 0
- 82. Demand Characteristics <ul><li>Which market is riskier for producers… elastic or inelastic demand? </li></ul><ul><li>Which market would you start a business in? </li></ul><ul><li>Which market is more apt to need government subsidies to stabilize producer incomes? </li></ul>
- 83. The Market Demand Curve Price Quantity What causes movement along a demand curve?
- 84. The Market Demand Curve Price Quantity What causes the demand curve to shift?
- 85. In Summary… <ul><li>Know how to interpret all three elasticities </li></ul><ul><li>Know how to interpret a price flexibility </li></ul><ul><li>Understand revenue implications for producers if prices are cut (raised) </li></ul><ul><li>Understand the welfare implications for consumers if prices are cut (raised) </li></ul><ul><li>Know what causes movement along versus shifts the demand curve </li></ul>
- 86. Chapter 6 starts a series of chapters that culminates in a market supply curve for food and fiber products….

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