1、2012.09.29,Lecture Four Welcome to the Microeconomics World!,1,Chapter 4 Supply and Demand: Elasticity and Applications,2,Overview,3,As we have already known, properly framed, the essence of most economic questions can be approached using the basic market analysis you learned in Chapter 3. Properly
2、interpreted, the answer to almost any question concerning resource allocation can be explained in terms of supply-demand intuition.,Overview,4,In Chapter 3, we have learned the law of demand and supply. And, we know there are some factors other than the own price of the good will affect consumers or
3、 firms behavior, shifting the demand or supply curve. Income increase demand curve shifts to the right other things equal, both price and quantity exchanged increase Technology progress supply curve shifts to the right held other things constant, price goes down and quantity exchanged increases,Over
4、view,5,This leads naturally to the following questions:“By how much?”How large are the responses to the changes, and upon what does this responsiveness depend ? This chapter will provide you with the tools you need to answer this question and with the opportunity to apply your tools in the arena of
5、policy-making.,4.1 Price Elasticity of Demand and supply4.1.1 Price Elasticity of Demand Calculating Elasticities Price Elasticity Diagrams A Shortcut for Calculating Elasticities The Algebra of Elasticities Elasticity is Not the Same as Slope4.1.2 Elasticity and Revenue4.1.3 Price Elasticity of Sup
6、ply,Outline,6,4.2 Applications to Major Economic Issues4.2.1 The Economics of Agriculture Long-run Relative Decline of Farming Crop Restrictions4.2.2 Impact of a Tax on Price and Quantity4.2.3 Minimum Floors and Maximum Ceilings The Minimum-Wage Controversy Energy Price Controls Rationing by the Que
7、ue, by Coupons, or by the Purse? Summary,Outline,7,4.1 Price Elasticity of Demand and supply,8,To solve the “How much” question, we need to introduce a new and key economic concept ElasticityAll elasticities are designed to answer this question. For example, we know from the law of demand that as pr
8、ice falls, quantity demanded increases.,4.1.1 Price Elasticity of Demand,9,Price elasticity of demand describes the percentage change in quantity demanded of a product caused by some percentage change in its price.,4.1.1 Price Elasticity of Demand,10,When the price elasticity of a good is high, we s
9、ay that the good has “elastic” demand, which means that it quantity demanded responds greatly to price changes. When the price elasticity of a good is low, we say that the good has “inelastic” demand, which means that it quantity demanded responds little to price changes.,4.1.1 Price Elasticity of D
10、emand,11,Goods that have available substitutes tend to have more elastic demand than those that have no substitutes. (page 66) Why? Considering apples and banana, suppose they are substitutes. If the price of apples goes up, consumers will reduce the consumption on apples, and consume more banana. W
11、hich means that for a given percentage change in price, the percentage change in quantity demanded will be large. (you have other alternative choices),4.1.1 Price Elasticity of Demand,12,considering footwear, it has little substitutes. you can not go around barefoot. If you dont ware a pair of shoes
12、, what do you plan to ware? Which means that for a given percentage change in price, the percentage change in quantity demanded will be small. (you barely have any choice),4.1.1 Price Elasticity of Demand,13,The price of elasticities of demand for individual goods are determined by the economic char
13、acteristics of demand. Price elasticities tend to be higher when the goods are luxuries, when substitutes are available, and when consumers have more time to adjust their behavior.,4.1.1 Price Elasticity of Demand,14,Demand for most goods will be more elastic in the long run than in the short run, s
14、ince a longer time frame allows consumers to search more carefully for substitutes. By contrast, elasticities are lower for necessities, for goods with few substitutes, and for the short run.,4.1.1 Price Elasticity of Demand,15,Calculating Elasticities Notice that the sign of ED will always be negat
15、ive. That is, as long as the demand curve is downward-sloping, there will be an inverse relationship between P and Qd. Therefore when you interpret ED, just look at its absolute size, or absolute value. Ignore the negative sign.,4.1.1 Price Elasticity of Demand,16,Then we can do the following analys
16、es. Demand is defined as elastic when the percentage change in quantity demanded is greater than the percentage change in price. (ED 1) Demand is defined as inelastic when the percentage change in quantity demanded is less than the percentage change in price. (ED 1) Demand is defined as unit elastic
17、 when the percentage change in quantity demanded is equal to the percentage change in price. (ED = 1),4.1.1 Price Elasticity of Demand,17,Price elasticity of demand between any two points on a demand curve can be calculated using the following (mid-point) formula:,4.1.1 Price Elasticity of Demand,18
18、,4.1.1 Price Elasticity of Demand,19,What can we conclude then? ED=2, demand is therefore elastic in the region from A to B.We already know how to calculate ED between two points on the demand curve. Is there any other method that we can use to determine the ED? Yes, we can use diagrams.,4.1.1 Price
19、 Elasticity of Demand,20,In each case of the above figure, price is cut in half (percentage change in price is 66.7%). A halving of price has tripled Qd. price-elastic demand The doubling of Qd exactly matches the halving of price. unit-elastic demand Cutting price in half led to only a 50% increase
20、 Qd in . price-inelastic demand,21,It displays the important polar extremes where the ED are infinite and zero, or completely elastic and completely inelastic. Vertical demand curve: demand for water or electricity Horizontal demand curve: constant price, if prices go up, no consumption at all.,22,4
21、.1.1 Price Elasticity of Demand,A shortcut for Calculating Elasticities The elasticity of a straight line at a pint is given by the ratio of the length of the line segment below the point to the length of the line segment above the point. The procedure is shown in the next figure.,4.1.1 Price Elasti
22、city of Demand,23,The straight line is equally divided. For point B, the segment below B (BZ) is 3 times as long as that above B (AB). Therefore, ED at B is 3. ED at M is 1. ED at R is 1/3.,24,4.1.1 Price Elasticity of Demand,All linear demand curves are elastic at the top, are unitary elastic at th
23、eir midpoint, and are inelastic at the bottom.Now we can calculate the elasticities of the points on a straight line. Can we also calculate the elasticities of the points on a curve? Yes. First of all, we need to find a line tangent to a point on a curve.,4.1.1 Price Elasticity of Demand,25,Then we
24、calculate the ratio of segments for the tangent line at point B. The will provide the correct calculation of elasticity for the curved line at point B. ED at B is 3 The curved demand has an elasticity of 3 at point B.,26,4.1.1 Price Elasticity of Demand,The Algebra of Elasticities Here, we show the
25、algebra of elasticities for straight-line (linear) demand curve. We begin with a demand curve, which is written as Q = a + bP a is the intercept, and b is the slope Suppose (P0, Q0) is on the line, what is the elasticity at this point?,4.1.1 Price Elasticity of Demand,27,Note that the elasticity dep
26、ends upon the slope of the demand curve, but it also depends upon the specific price and quantity pair.,4.1.1 Price Elasticity of Demand,28,Demand curves that are flat tend to be relatively more elastic than demand curves that are steep. (Figure 4-2) However, for a linear demand curve, it is not true that a flat slope means elastic demand, or that a steep slope means inelastic demand. Why? Because elasticities depend on not only slope, but also the price and quantity pair. Keep in mind: the definition of price elasticity of demand,4.1.1 Price Elasticity of Demand,29,
