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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.
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