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## Supply%20

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### Supply & Demand Elasticity & Government Set Prices Chapter 7 – PowerPoint PPT presentation

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Title: Supply%20

1
Supply DemandElasticity Government Set
Prices
• Chapter 7

2
Price Elasticity of Demand
• Measured by the responsiveness of consumers to a
price change.
• Formula
• change in quantity demanded
• change in price

3
Elimination of Minus Sign
• Price and quantity have an inverse relationship
• When using the elasticity formula, it will be a
negative number.
• Ignore the minus sign to avoid any ambiguity

4
Elastic Demand
• Demand is elastic if change in price results in
a larger change in quantity demanded
• Formula results in a number greater than 1

5
Inelastic Demand
• Demand is inelastic if change in price produces
a smaller change in demand
• Formula results in a number less than 1

6
Unit Elastic Demand
• change in price and change in demand are the
same
• Formula equals 1

7
Extreme Cases
• Perfectly inelastic- price change results in no
change in quantity demanded
• Perfectly elastic- small price reductions cause
buyers to increase their purchases from zero to
all they can obtain

8
Midpoint Formula
• Change in quantity change in price
• Sum of quantities sum of prices

9
Quantity Price Total Revenue (Price X Qty) Elasticity E, I, or U
1 8 --- ---
2 7
3 6
4 5
5 4
6 3
7 2
8 1
10
Total-Revenue Test
• Total revenue- total amount sellers receive from
sale of a product
• Price X Quantity sold
• Total revenue test looks at what happens to total
revenue when product price changes

11
Summary
Absolute Value Demand Is Description Impact on TR of a Price increase Impact on TR of a Price decrease
gt1 Elastic Qd changes by a larger than does price TR decreases TR increases
1 Unit Elastic Qd changes by the same as price TR is unchanged TR is unchanged
lt1 Inelastic Qd changes by a smaller than price TR increases TR decreases
12
Price Elasticity Total Revenue Curve
• Comparison of curves D and TR shows relationship
between elasticity and total revenue

13
Determinants of Price Elasticity of Demand
• Substitutability
• Proportion of Income
• Luxuries vs. Necessities
• Time

14
Price Elasticity of Supply
• If producers are responsive to a price change,
supply is elastic vice versa
• Formula
• change in quantity supplied
• change in price

15
Cross Elasticity of Demand
• Measures how sensitive consumer purchases of one
product are to a change in price of some other
product
• Formula
• change in qty demanded for product x
• change in price of product y

16
Income Elasticity of Demand
• Formula
• change in quantity demanded
• change in income
• Measures the responsiveness of consumers to
changes in income and the impact it has on demand

17
Government Set Prices
• Price ceiling- maximum legal price a seller may
charge
• Rationale enable consumers to obtain an
essential product that they could not afford at
equilibrium.

18
Black Markets
• Products are bought and sold at prices above the
legal limits.
• Buyers are willing to pay more than the ceiling
price which allows companies to make more
profits.

19
Price Floors Surpluses
• Minimum prices fixed by the government. A price
at or above the price floor is legal.
• Examples include farm products that are already
sold at low prices. Government raises the price
to assist farmers to earn higher incomes.