Title: ECON 1001 AB Introduction to Economics I Dr. Ka-fu WONG
1ECON 1001 ABIntroduction to Economics IDr.
Ka-fu WONG
- Fourth week of tutorial sessions
- KKL 925, K812, KKL 106
- Clifford CHAN
- KKL 1109
- givencana_at_yahoo.ca
2Covered and to be covered
- Covered last week
- Dr. Wong finished up to kf004.ppt
- You should have at least read up to Chapter 4
Elasticity. - If not, please press hard on them. We are getting
to the first midterm! - Start reading Chapter 5 Demand The Benefit Side
of the Market - Your first midterm covering chapter 1 chapter 4
will be held on this Saturday October 6, 2007 at
9am - To be covered in the tutorial sessions this week
- Problems in chapter 4 1, 3, 5, 7 and 9
- You are advised to work on the even ones as well
3Problem 1, Chapter 4
- On the accompanying demand curve, calculate the
price elasticity of demand at points A, B, C, D
and E.
Price
A
100
B
75
C
50
D
25
E
0
100
25
50
75
Quantity
4Solution to Problem 1 (1)
- Price elasticity of demand refers to the
percentage change of quantity demanded relative
to the percentage change of price - In other words, price elasticity of demand
indicates how much will the quantity demanded
change with respect to a 1 change in price - Thus, it measures the responsiveness of quantity
demanded to change in price
5Solution to Problem 1 (2)
- Price elasticity of demand is always a negative
index, as the demand curve is downward sloping - For convenience, we always take absolute value of
a price elasticity of demand - When the absolute value of a price elasticity of
demand is greater than one, that means percentage
change in quantity demanded is greater than
percentage change in price - If this is the case, we regard the highly
responsive demand as ELASTIC
6Solution to Problem 1 (3)
- When the absolute value of a price elasticity of
demand is less than one, that means percentage
change in quantity demanded is less than
percentage change in price - If this is the case, we regard the weakly
responsive demand as INELASTIC - When the absolute value of a price elasticity of
demand is exactly equal to one, that means
percentage change in quantity demanded is the
same as percentage change in price - If this is the case, we regard the
mirror-responsive demand as UNITARY ELASTIC
7Solution to Problem 1 (4)
- General formula for (Own) Price Elasticity of
Demand - (Change of quantity demanded / Total quantity
demanded) / (Change of price / Original Price) - Rearranging terms, we will get
- (Change in quantity demanded / Change in price)
(Original Price / Total quantity
demanded) - (1 / Slope of the demand curve) (P / Q)
- Using the formula, we can derive price elasticity
of demand at any point along the demand curve
8Solution to Problem 1 (5)
- Point A
- 1 / Slope of the demand curve 1 / (-100/100) -1
- Price is 100 and quantity demanded is 0
- Price elasticity of demand -1 (100 / 0)
- Price elasticity of demand Infinity
- The demand is perfectly elastic
- Point B
- 1 / Slope of the demand curve -1
- Price is 75 and quantity demanded is 25
- Price elasticity of demand -1 (75 / 25)
- Price elasticity of demand -3 (Or 3 in if we
take absolute value) - As it is greater than 1, the demand is elastic
9Solution to Problem 1 (6)
- Point C
- 1 / Slope of the demand curve -1
- Price is 50 and quantity demanded is 50
- Price elasticity of demand -1 (50 / 50)
- Price elasticity of demand -1 (Or 1 if we take
the absolute value) - As it is exactly equal to 1, the demand is
unitary elastic - Point D
- 1 / Slope of the demand curve -1
- Price is 25 and quantity demanded is 75
- Price elasticity of demand -1 (25 / 75)
- Price elasticity of demand -1/3 (Or 1/3 if we
take the absolute value) - As it is less than 1, the demand is inelastic
10Solution to Problem 1 (7)
- Point E
- 1 / Slope of the demand curve -1
- Price is 0 and quantity demanded is 100
- Price elasticity of demand -1 (0 / 100)
- Price elasticity of demand 0 (Or 0 if we take
the absolute value) - As it is exactly equal to 0, the price elasticity
of demand is zero - The demand is perfectly inelastic- the quantity
demanded does not change regardless of the change
in price
11Problem 3, Chapter 4
- Suppose, while rummaging through your uncles
closet, you found the original painting of Dogs
Playing Poker, a valuable piece of art. You
decided to set up a display in your uncles
garage. The demand curve to see this valuable
piece of art is as shown in the diagram. What
price should you charge if your goal is to
maximize your revenues from tickets sold? On a
graph, show the inelastic and elastic regions of
the demand curve.
12
Price (/visit)
0
6
Quantity (visitors/day)
12Solution to Problem 3 (1)
- Where is the source of revenue from displaying
the artwork in your uncles garage? - Selling admission tickets to your uncles garage
- How much should you charge in order to maximize
the revenue? - You should charge a price where the marginal
revenue marginal cost - However, no supply curve is given in this
problem, and we can only consider the demand
curve alone - How much should you charge then?
- You should charge at the price where it is the
midpoint of the demand curve
13Solution to Problem 3 (2)
- At the midpoint of a linear demand curve, the
price elasticity of demand is unitary elastic (1) - Percentage of change in quantity demanded
Percentage of change in price - Left of the midpoint, the price elasticity of
demand is elastic (gt1) - Percentage of change in quantity demanded is
greater than Percentage of change in price - Lowing the price will lead to an increase in
quantity demanded, and thus revenue will go up
14Solution to Problem 3 (3)
- Right of the midpoint, the price elasticity of
demand is inelastic (lt1) - Percentage of change in quantity demanded is less
than Percentage of change in price - Increasing the price will only lead to a slight
decrease in quantity demanded, and thus revenue
will go up - At the midpoint,
- Further change in price will cause total revenue
fall - The optimal price is settled at the midpoint of a
demand curve - Therefore, you should charge 6 for each
admission ticket where the total quantity
demanded is 3
15Solution to Problem 3 (4)
Price ( per visit)
12
Elastic region
Midpoint
6
Inelastic region
Quantity (Visitors per day)
6
3
- Elastic region is located on the left of the
midpoint - Inelastic region is located on the right of the
midpoint
16Problem 5, Chapter 4
- Among the following groups- senior executives,
junior executives, and students- which is likely
to have the most and which is likely to have the
least price-elastic demand for membership in the
Association of Business Professionals?
17Solution to Problem 5 (1)
- Senior executives are most likely to have a least
price-elastic demand for membership in the
Association of Business Professionals - Senior executives have a higher income than
junior executives, while junior executives have a
higher income than students - The membership shares only a small portion of the
income earned by a typical senior executive - Change in price of the membership causes a small
effect on senior executive
18Solution to Problem 5 (2)
- The membership shares a notable portion of the
income earned by a typical junior executive - Change in price of the membership causes a
notable effect on junior executives - The membership shares a considerable portion of
the income earned by a typical student - Change in price of the membership causes a
considerable effect on students - In general, one earning high income is less
likely to respond to change in price dramatically
as the price is actually a very small portion of
ones consumption budget
19Solution to Problem 5 (3)
- Therefore, senior executives have a least
price-elastic demand for the membership - Which of the three groups has the most
price-elastic demand for the membership? - Students
- They earning the lowest income among the groups
will be affected the most by the change in price
of the membership as it takes a considerable
portion of their income - Hence, they will probably respond dramatically to
change in the price of the membership
20Problem 7, Chapter 4
- What are the respective price elasticities of
supply at A and B on the supply curve shown in
the accompanying figure?
S
B
6
Change in price
A
Price
4
Change in quantity
0
9
12
Quantity
21Solution to Problem 7 (1)
- Calculating price elasticity of supply is almost
identical to calculating price elasticity of
demand, except for the slope of the curve - Price elasticity of supply refers to the
percentage change of quantity supplied relative
to the percentage change of price - In other words, price elasticity of supply
indicates how much will the quantity supplied
change with respect to a 1 change in price - Thus, it measures the responsiveness of quantity
supplied to change in price
22Solution to Problem 7 (2)
- Price elasticity of supply is always a positive
index, as the supply curve is upward sloping - When a price elasticity of supply is greater than
one, that means percentage change in quantity
supplied is greater than percentage change in
price - If this is the case, we regard the highly
responsive supply as ELASTIC
23Solution to Problem 7 (3)
- When a price elasticity of supply is less than
one, that means percentage change in quantity
supplied is less than percentage change in price - If this is the case, we regard the weakly
responsive supply as INELASTIC - When a price elasticity of supply is exactly
equal to one, that means percentage change in
quantity supplied is the same as percentage
change in price - If this is the case, we regard the
mirror-responsive supply as UNITARY ELASTIC
24Solution to Problem 7 (4)
- General formula for (Own) Price Elasticity of
Supply - (Change of quantity supplied / Total quantity
supplied) / (Change of price / Original Price) - Rearranging terms, we will get
- (Change in quantity supplied / Change in price)
(Original Price / Total quantity
supplied) - (1/ Slope of the supply curve) (P / Q)
- Using the formula, we can derive price elasticity
of supply at any point along the supply curve
25Solution to Problem 7 (5)
- Point A
- 1 / Slope of the supply curve 1 / (2/3) 3/2
- Price is 4 and quantity supplied is 9
- Price elasticity of supply 3/2 (4 / 9)
- Price elasticity of supply 2/3
- As it is less than 1, the supply is inelastic
- Point B
- 1 / Slope of the supply curve 1 / (2/3) 3/2
- Price is 6 and quantity supplied is 12
- Price elasticity of supply 3/2 (6 / 12)
- Price elasticity of supply 3/4
- As it is less than 1, the supply is inelastic
26Problem 9, Chapter 4
- At point A on the demand curve shown, by what
percentage will a 1 percent increase in the price
of the product affect the total expenditure on
the product?
6
Price (/unit)
A
4
18
6
Quantity (units/week)
27Solution to Problem 9 (1)
- In order to answer this question, we will need to
compute the price elasticity of demand - Applying the general formula, Price elasticity of
demand (1/ Slope of the demand curve) (P/Q),
we get - Price elasticity of demand
- 1 / Slope of the demand curve 1 / (-1/3) -3
- Price is 4 and the quantity demanded is 6
- Price elasticity of demand -3 (4/6) -2 (Or
2 if we take the absolute value) - As it is greater than 1, the demand is elastic
28Solution to Problem 9 (2)
- Based on the price elasticity of demand, we
conclude that a 1-percent increase in price will
cause a 2-percent decrease in quantity demanded
for the product - How much does the total expenditure change?
- Total expenditure (TE) Price (P) Quantity (Q)
- What will happen if the price increases by 1 and
quantity demanded decreases by 2? - Initially, TE P Q
- After the change in price, TE will become 1.01P
0.98Q
29Solution to Problem 9 (3)
- From the Total Expenditure function 1.01P
0.98Q, a 0.02 decrease in quantity demanded with
a 0.01 increase in price of the product, will
approximately lead to a 0.01 (1) reduction in
Total Expenditure.
30The end
- Thanks for coming!
- Good luck in your midterm!!!