Macroeconomics

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Macroeconomics

• Lesson 2

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Topics

• 1. Homework
• 2. Review Supply and Demand
• 3. Floors and Ceilings
• 4. Elasticity

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Correct the Homework

• Answers
• 1. P 7.50 Q 350
• 2. P 55 Q 570
• 3. P 375 Q 85
• 4. P 1375 Q 17

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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
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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?

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Floors and Ceilings

• See the examples on the board.

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Price Elasticity of Demand

• Measures the sensitivity or (responsiveness) of
  quantity consumers demand to changes in the
  price of a product

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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)(Q1Q2)(P1-P2)(P1P2)

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Examples

• 1. Q1 250 Q2 300 P150 P240
• Answer 0.81 ( lt1, inelastic)
• 2. Q1 250 Q2 500 P1 6 P25
• Answer 3.66 (gt1, elastic)
• 3. Q1 250 Q2 300 P1 6 P25
• Answer 1 (unit elastic)

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More examples

• 4. Q1 500 Q2 500 P1 6 P25
• Answer 0 (perfectly inelastic)
• 5. Q1 500 Q2 600 P1 5 P25
• Answer undefined (perfectly elastic)

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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

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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

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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

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Circular Flow