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AS Micro - Elasticity of Demand and Supply

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Revision presentation on elasticity of demand and supply

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AS Micro - Elasticity of Demand and Supply

1. 1. Follow Geoff Riley on Twitter @tutor2u_econ For the AS micro exam, follow the hash tag #econ1 www.tutor2u.net for extra revision resources
2. 2. Elasticity • Classification is important when applying elasticity theory • Be careful when discussing ‘food’ or ‘electrical goods’ – different classifications within these groups will have very different values of elasticity of demand and / or supply 7:49:36
3. 3. • Page 20 of your booklet has a double-page dedicated to formulae, definitions and diagrams for elasticity • Learn these really well – you are guaranteed to be using these concepts in your exams! 7:49:36 Elasticity
4. 4. List 6 factors that can affect price elasticity of demand 7:49:36 Necessity or luxury? Availability of close substitutes Consumer income Brand loyalty Habitual consumption Frequency of purchase Who pays?
5. 5. Price Elasticity of Demand WH Smith have recently reduced the price of its Kobo Mini E-reader from £60 to £40. They predict that sales of the E-reader will increase from 15,000 units a month to 25,000 a month (nationwide). What is the price elasticity of demand for this price change for the Kobo Mini-reader? 7:49:36
6. 6. Price Elasticity of Demand 7:49:36 PED = % Δ in QD % Δ in P PED = 66% -33% PED = -2 Price Elastic
7. 7. 7:49:36 The diagram illustrates the demand and supply for the market of ‘weekend’-style tents (small tents that are designed to be used for only a few days). Calculate the Price Elasticity of Demand for weekend-tents following the fall in manufacturing costs. PED = % Δ in QD % Δ in P PED = 50 -20 PED = -2.5 Price Elastic Price Elasticity of Demand
8. 8. 7:49:36 Calculate the change in revenues for camping manufacturers following the recent changes in production costs. Revenue = Quantity x Sales Price Revenue at E1 = 250 x 400 = £100,000 Revenue at E2 = 200 x 600 = £120,000 Difference in revenue = + £20,000 Price Elasticity of Demand
9. 9. 7:49:36 The price elasticity indicates what is likely to happen to revenue and profit following a price change. In this case, because demand is elastic, the fall in price was likely to lead to an increase in revenue Price Elasticity and Producer Revenue
10. 10. A business that makes hard-shelled suitcases aimed at holidaying tourists has increased its prices by 5%. As a consequence, they have seen a drop in sales between January and March by 15% (compared to a same time of the year last year). It could be concluded that the price elasticity of demand for the suitcases is and as a result total spending by consumers on the product will rise/fall/remain the same? 7:49:36 Elastic Price Elasticity of Demand
11. 11. 7:49:36 Cross Price Elasticity of Demand (XED)
12. 12. 7:49:36 Beats Studio (by Dr Dre) headphones retail at approximately £200 per unit. Following a change in price of the headphones (an increase in £20), there is an increase demand for a rival brand of headphones by 7.5%. What is the Cross Elasticity of Demand between the Beats Studio headphones and its rival? Cross Price Elasticity of Demand (XED)
13. 13. 7:49:36 XED = % Δ in QDA % Δ in PB XED = +7.5 +10 XED = + 0.75 Products are substitutes +0.75 is a low value Dr Dre can increase price of product without losing too many customers. Revenue will increase. Cross Price Elasticity of Demand (XED)
14. 14. A. +4 B. +2 C. −2 D. −4 7:49:36 Price of X (£) Quantity demanded of X Quantity demanded of Y 30 20 30 27 24 42 The table below shows the price and quantity demanded of two goods, X and Y When the price of X falls from £30 to £27, the cross elasticity of demand for Y with respect to the price of X is Product X and Y are strong complements Cross Price Elasticity of Demand (XED)
15. 15. 7:49:36 A cinema chain calculates that the cross elasticity of demand between its cinema tickets and sales of its popcorn is -2. The cinema is considering a week-long reduction in the price of its tickets as a promotion – it is planning to drop its prices by 20%. Calculate what you would expect to happen to the demand for popcorn. XED = % Δ in QDA % Δ in PB Cross Price Elasticity of Demand (XED)
16. 16. Income Elasticity of Demand 7:49:36
17. 17. 7:49:36 The government decreases the rate of income tax so that, on average, all citizens have 2% more disposable income. A small cereal firm, specialising in a granola-style breakfast cereal sees an increase in sales by 5%. What is the Income Elasticity of Demand for the breakfast cereal? YED = % Δ in QD % Δ in Y YED = 5 2 YED = + 2.5 The granola cereal is a luxury good Income Elasticity of Demand
18. 18. 7:49:36 The Income Elasticity of Demand for a non-branded chocolate bar in a supermarket is -0.2. If real incomes in the UK increased by 1%, what is the likely change to demand for the chocolate bar? YED = % Δ in QD % Δ in Y - 0.2 = % Δ in c 1 % Δ in c = - 0.2% Non-branded chocolate is an inferior good Income Elasticity of Demand
19. 19. 7:49:36 Suggest 3 further inferior goods: Inter-city bus services (compared to trains) Own-label burger Non-Smart phones! Income Elasticity of Demand
20. 20. Price Elasticity of Supply 7:49:36 What factors can impact on the PES? Spare Capacity (e.g. with machinery) Stock levels Length of production times
21. 21. 7:49:36 Two firms produce sports trophies that are sold in retail outlets (who will add value to the trophies by using an inscribing machine to personalise the trophy). If both firms increase their prices by 5%, firm A will see an increase in output by 2.5% and firm B will see a rise in output by 7.5%. Calculate the Price Elasticity of Supply for both firms. Price Elasticity of Supply
22. 22. 7:49:36 Price Elasticity of Supply PES = % Δ in QS % Δ in P PES = 2.5 5 PES = 0.5 Inelastic FIRM A PES = 7.5 5 PES = 1.5 Elastic FIRM B
23. 23. 7:49:36 Price Elasticity of Supply PES = % Δ in QS % Δ in P FIRM A FIRM B S S
24. 24. Price Elasticity of Supply 7:49:36 A firm that produces sunflower oil-based margarine is faced with the following conditions: 1. It is working at full capacity. 2. Its storage tanks are full. 3. It has negotiated a contract with 5 new producers of the sunflower oil to add to its current group of suppliers. 4. It requires three months to train new workers to qualify in quality checking procedures. Which of the conditions will tend to make the supply of margarine relatively price inelastic? A: 1 and 2 B: 1 and 4 C: 2 and 3 D: 3 and 4
25. 25. You are about to be presented with four multi-choice questions relating to ‘elasticity.’. The correct answer for each question should be recorded on your ‘Combination Cracker’ ticket (on page 18) click to continue7:49:36
26. 26. Be warned, one of the 4 questions has two possible answers, so you will need a 5 digit code! click to continue7:49:36
27. 27. A 10% increase in fares will lead to a 15% decrease in passengers Rail travel is an inferior good Rail travel has a negative cross elasticity of demand As unemployment falls, more people will use trains 1 The income elasticity of demand for rail travel is − 1.5. This means that……. A B C D 7:49:36
28. 28. click to continue 7:49:36
29. 29. less elastic in the long run than in the short run determined by the availability of substitutes affected by the stocks of wheat available more inelastic when the production time frame is long 2 The price elasticity of supply of maize is… A B C D 7:49:36
30. 30. click to continue 7:49:36
31. 31. A negative income elasticity of demand A positive price elasticity of demand A positive cross elasticity of demand A negative cross elasticity of demand 3 Which one of the following measures of elasticity indicates that two goods are complements? A B C D 7:49:36
32. 32. click to continue 7:49:36
33. 33. inversely related to price of unitary elasticity perfectly elastic perfectly inelastic 4 An indirect tax on the production of a good will have no effect on price if demand is….. A B C D 7:49:36
34. 34. 7:49:36
35. 35. a 10% increase in fares will lead to a 15% decrease in passengers. rail travel is an inferior good. rail travel has a negative cross elasticity of demand. as unemployment falls, more people will use trains. 1 The income elasticity of demand for rail travel is − 1.5. This means that……. A B C D 7:49:36
36. 36. less elastic in the long run than in the short run determined by the availability of substitutes affected by the stocks of wheat available more inelastic when the production time frame is long 2 The price elasticity of supply of maize is… A B C D 7:49:36
37. 37. A negative income elasticity of demand A positive price elasticity of demand A positive cross elasticity of demand A negative cross elasticity of demand 3 Which one of the following measures of elasticity indicates that two goods are complements? A B C D 7:49:36
38. 38. inversely related to price of unitary elasticity perfectly elastic perfectly inelastic 4 An indirect tax on the production of a good will have no effect on price if demand is….. A B C D 7:49:36
39. 39. B C D D So the correct combination was….. C 7:49:36
40. 40. Follow Geoff Riley on Twitter @tutor2u_econ For the AS micro exam, follow the hash tag #econ1 www.tutor2u.net for extra revision resources