Macroeconomics Lesson 2. Topics 1. Homework 2. Review Supply and Demand 3. Floors and Ceilings 4....
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Transcript of Macroeconomics Lesson 2. Topics 1. Homework 2. Review Supply and Demand 3. Floors and Ceilings 4....
Macroeconomics
Lesson 2
Topics
1. Homework
2. Review Supply and Demand
3. Floors and Ceilings
4. Elasticity
Correct the Homework
Answers:1. P = $7.50 Q = 3502. P = 55¢ Q = 5703. P = $375 Q = 854. P= $1375 Q= 17
Another S & D example
Price Q d Price Q s
60 0 60 500
50 100 50 400
40 200 40 300
30 300 30 200
20 400 20 100
10 500 10 0
Answer:
Price = $35, Quantity = 250
What happens to price and quantity if the price of a substitute good increases?
What happens to price and quantity if the cost of production decreases?
Floors and Ceilings
See the examples on the board.
Price Elasticity of Demand
Measures the sensitivity or (responsiveness) of quantity consumers demand to changes in the price of a product
Equation for Coefficient of Elasticity of Demand
% change in quantity ÷ % change in price
The equation for determining the coefficient elasticity of demand is:
[(Q1-Q2)÷(Q1+Q2)]÷[(P1-P2)÷(P1+P2)]
Examples
1. Q1 = 250 Q2 = 300 P1=50 P2=40
Answer = 0.81 ( <1, inelastic)
2. Q1 = 250 Q2 = 500 P1 = $6 P2=$5
Answer = 3.66 (>1, elastic)
3. Q1 = 250 Q2 = 300 P1 = $6 P2=$5
Answer = 1 (unit elastic)
More examples
4. Q1 = 500 Q2 = 500 P1 = $6 P2=$5
Answer = 0 (perfectly inelastic)
5. Q1 = 500 Q2 = 600 P1 = $5 P2=$5
Answer = undefined (perfectly elastic)
Sesame Street School of Ed
A key to identifying elastic or inelastic demand is the shape of the Demand Curve:
The more the curve looks like a capital I, the more inelastic the demand, and the fewer the substitutes
The more the curve looks like a capital E, the more elastic the demand, and there must be many substitutes
Uses of Elasticity of Demand
We can use Elasticity of Demand to determine the price where we Maximize Total Revenue
Remember the equation for Total Revenue TR = Price x Quantity
Other uses for Ed
Tax incidence: who pays the tax?
Predict the change in quantity from a change in price
Evaluate the effectiveness of social policies
Circular Flow