Price elasticity of demand

PEG is a long term sport; NAB, not so much 3. Sisters abuse: all else equal -+ focusing only on their opportunity cost and not their past and/or background G. Link between graph and opportunity cost: slope of APP = opportunity cost 1 . Increasing opportunity cost principle: Concave shape -+ higher opportunity cost as you go down and to the right of the curve a. Absolute value of the slope 2. Reason for increasing opportunity cost principle a. Imperfect substitution among resources b. Cannot expect a computer specialist to be as good at a person who is producing cars c.

More difficult to make the transformation, more concave the APP I. More unrelated, more concave H. Growth: producing more of the goods -+ outward shift of the POMP 1 . Growth can come about from increase in resources or technology 2. Reason for economic decline: manmade/natural disasters a. Manmade disasters examples: war b. WI, Germany -+ outward during war, inward decline after c. Hawaii hit hardest by 9/1 1 because of fear of flying Ill. Comparative Advantage 1. David Richard said gains can be made from trade a. Have a competitive advantage with a lower opportunity cost b.

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Countries can both benefit mutually 2. Adam Smith, 1776, Wealth of Nations (Father of Economics) a. Absolute Advantage if they produce more or use fewer resources 3. Tarry: no trade B. Example: Shirt Game 1. 0 1. 2 players: USA and China 2. Winner will be USA because everyone in the USA can be used 3. 3 players: USA, China, and India 4. Answers who can make the most, not who can make the lowest cost C. Example: U. S. Vs.. Japan (See graphs in notebook) 1. U. S. Has an advantage in cars because opportunity cost is lower 2. Japan has advantage in computers because opportunity cost is lower a.

U. S. Should move to A’ because of complete specialization b. Japan should move to B’ c. Specialization improves world production of both goods D. Terms of Trade . 1 for 1 because it lies between 2 countries’ price ratios 2. Both benefit from trade (A” and B” outside of opportunity cost) ‘V. Supply and Demand – Chapter 3 A. Prices are determined by market forces: buyers and sellers 1. SQ: quantity demanded -+ units P: price of product 2. SQ = f(P), inverse -+ P up, SQ down 3. The law of demand (Alfred Marshall) P = f(S,D) a. B. Inverse demand function (P on y-axis, SQ on x-axis . SQ=50-UP

To find y- and x- intercepts, convert into Inverse Demand Function (solve for price) I’. P=25-O. SQ What other factors or variables affect demand in general? (D. Curve shifters) 1 . Income Increased income and increased demand = normal good Increased income and decreased demand = inferior good . Low cost cars (Haunted), fast food . Buying things because it’s cheaper Tastes Ex: eggs, frozen yogurt Population (number of buyers) Higher population, higher demand Price of substitutes 4. Higher price of substitute, higher demand of original Ex: higher price of Pepsi, higher demand of Coke

Price of complements 5. Higher price of complements, lower demand of original 6. Expectations Higher expected price leads to increased demand today SQ and D . Change in P -+ movement along the curve Demand itself shifts the entire curve Rightward shift = more demand Leftward shift = less demand Same shifts for supply Supply 1. SQ positive, P up, SQ up Law of Supply E. What other factors of variables that affect supply in general? (S. Curve shifters) 1. Price of inputs a. Inverse relationship: higher price of input, lower supply b. Can’t make as many houses if lumber costs more c.

In other words: Higher production cost, lower supply 2. Technology a. Direct relationship: better technology, more supply b. Makes attaining supply faster, easier, cheaper 3. Number of sellers a. Direct relationship: more competition, more overall market supply b. More computer firms in the market, higher potential for total number of computers 4. Price of alternate a. Inverse: Higher price of alternate, decreased supply of other b. Ex: price of corn increases, supply of wheat decreases I. Corn is more profitable, so there is less wheat that will be produced in the market 5. Tax and regulation a.

Inverse: More tax on product, decrease supply of product b. Ex: increased taxes on coal, decreased supply of coal 6. Expectations a. Inverse: Higher expected price leads to lowered supply today F. Equilibrium 1. Satisfied if SQ=SQ 2. Market-clearing price 9/16/13 l. Predicting future price/quantity with Supply and Demand A. Demand change 1. Stronger demand -+ higher price, higher quantity Market 2. If price doesn’t change, shortage -+ price will increase B. Supply change 1. Lower supply -+ higher price, lower quantity C. Supply and Demand Change 1. Increase demand and supply: Unambiguous (certain): quantity increases a.

Ambiguous: price may increase if there is a stronger demand increase than the supply increase b. Price may decrease if there is a stronger supply increase than demand increase c. Price stays same if S increase = D increase II. Chapter 4: Elasticity Elasticity is the responsiveness of D to delta P P down, Q up, and vice versa. (By how much? ) c. 1. % A BTW old(XX) and problem with this formula: same change in value, different relative % 3. This problem: Midpoint formula Difference divided by average: (XX – XI)/(BAG: XSL ,XX) Inelastic if 1 Perfectly inelastic: demand curve vertical, Pep = O

Perfectly elastic: demand curve horizontal, Pep = Factors affect the elasticity of demand . Necessity Vs.. Luxuries Availability of close substitutes Demand for bread Vs.. Demand for diamond Bread is much more inelastic because less substitutes Scope of the market Shoes Vs.. Nikkei Shoes is more inelastic because more broad To fix . Nikkei is elastic because there are other brands you can buy 4. Time horizon Personal income . Slope elasticity . Practice Exercise #1 . Required textbooks or mystery novels Mystery novels more elastic because no other options for required textbooks 2.

Beethoven recordings or classical music recordings in general a. Beethoven more elastic because other substitutes by other composers 3. Heating oil during the next 6 months or heating oil during next 5 years a. Heating oil during next 5 years more elastic demand because long run is more elastic (more options to change over time) Root beer or water Root beer is more elastic because water is a necessity Applications of Elasticity G. . Elasticity and Total Revenue TRY=PIX = (rise) + (goes down) = +10% in P + (-5% Sq) suppose (E=O. 5) iii. ‘v. = +5% total revenue highest total revenue when elasticity = 1 (midpoint)

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