...how much buyers of the product want to buy at each price possible. Vertical axis: price Horizontal axis: annual demand Downward sloping: the higher the price, the less consumers want to buy. SUBSTITUTES: increase of price of one product makes consumers buy more of the other product (demand increases) COMPLEMENTS: increase of price of one product makes consumers buy less of the other (demand decreases) Change in price-> movement along the demand curve Change in other factors-> shift of the demand curve SUPPLY CURVES How much sellers of a product want to sell at every possible price. Vertical axis: price Horizontal axis: annual supply Upward sloping: the higher the price, the more sellers want to sell. MARKET EQUILIBRIUM EQUILIBRIUM PRICE: price at which the amounts supplied and demanded are the same. (intersection of supply and demand curve) CHANGES IN DEMAND OR SUPPLY (a) Increase in demand: demand curve shifts right-up, so the price and the amount bought and sold rise. (b) Decrease in demand: demand curve shifts left-down, so the price and the amount bought and sold fall. (c) Increase in supply: supply curve shifts right-down, so the price falls, but the amount bought and sold rises. (d) Decrease in supply: supply curve shifts left-up, so the price rises, but the amount bought and sold falls. ELASTICITY OF DEMAND AND SUPPLY Elasticity is used to avoid the problem of unit of measure. Elasticity: measures the responsiveness of...
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... Maybe the buyers don't want the good that much, so a small change in price has a large effect on their demand for the good. Figure %: Elastic Demand If demand is very inelastic, then large changes in price won't do very much to the quantity demanded. For instance, whereas a change of 25 cents reduced quantity by 6 units in the elastic curve in the figure above, in the inelastic curve below, a price jump of a full dollar reduces the demand by just 2 units. With inelastic curves, it takes a very big jump in price to change how much demand there is in the graph below. Possible explanations for this situation could be that the good is an essential good that is not easily substituted for by other goods. That is, for a good with an inelastic curve, customers really want or really need the good, and they can't get want that good offers from anywhere else. This means that consumers will need to buy the same amount of the good from week to week, regardless of the price. Figure %: Inelastic Demand Like demand, supply also has varying degrees of responsiveness to price, which we refer to as price elasticity of supply, or the elasticity of supply. An inelastic supplier (one with a steeper supply curve) will always supply the same amount of goods, regardless of the price, and an elastic supplier (one with a flatter supply curve) will change quantity supplied in response to changes in price. How Is Elasticity Measured? As we have noted, elasticity can be roughly compared...
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...1. You will need to thoroughly explain elasticity. You are expected to cover issues such as: a. What is it? Elasticity is how the demand or supply curve’s change to a change in the product. Whether it be price, quantity or another factor in the market. There are different elasticity calculations that can be used. Price elasticity of demand is the % change in quantity demanded / % change in price. Price elasticity of supply is the % change in quantity supplied / % change in price. Income elasticity of demand is the % change in demand of a product / % change in the consumer’s income. You are also able to calculate the change in price if a good that is related to your product using the cross-price elasticity of demand. This calculation is % change in demand of your product / % change in the price of a related good. b. Why is it used and why is it important? The elasticity calculations are used to see how your product’s demand reacts to changes in the market. It allows you to analyze your place in the market and lets you make business decisions for what price you want to charge for your product to how much of your product you want to be on the self. Understanding these calculations will help your business succeed. Scenario 2. The current price, paid by businesses, for your widget is $3.00. The current quantity you sell to various businesses is 150,000 per month. You decide to cut the price of your widget from $3.00 to $2.70. You expect that the quantity you...
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...Elasticity of demand is the degree to which demand for a good or service varies with its price. Elasticity of demand is seen most with confectionary and other non-essentials such as cars and appliances. Sales go up as prices go down and as prices go up sales go down. Cross-price elasticity measures the responsiveness of demand for a good that occurs in response to a percentage change in the price of another good. Complements are goods with a negative cross of elasticity demand. These goods are normally used with each other such as cars and gas. As the price of gasoline goes up the sale for cars goes down. In contrast, substitutes are goods with a positive cross elasticity demand. As the price of one good increases the demand for another good will also increase. As the price of butter increases consumers will buy more margarine. Income elasticity measures the change in quantity demanded of a good and the change in income for the people using that good. If income is increased by 20% and the demand for a good is increased by 30%, the income elasticity would be 1.5. When there is negative income elasticity, the increase in income will cause a decrease in inferior goods, and possible the increase in luxury substitutes. As income increases, the demand for inexpensive cars will fall and the demand for higher-end models increases. The inexpensive car is considered an inferior good . The opposite of inferior goods is normal goods. Normal goods have positive income elasticity...
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...Topic 2: Elasticity One motivation for studying elasticity is so that firms will know how their revenue might change in response to various price changes. Certainly firms are interested in setting prices in such a way to increase their revenue. Let total revenue be price multiplied by quantity (TR = P . Q). Consider the following demand curves. If we raised the price, would total revenue increase or decrease? Price INELASTIC (like the letter I) Demand Quantity Price ELASTIC (like the letter E) Demand Quantity By “eyeballing” the graphs, it appears that in the first instance, increasing price would raise revenue. In the second graph, a price increase would probably decrease total revenue. This is because the demand curve in the first graph represents a relatively price-insensitive demand, and this demand curve is consequently relatively inelastic. In the second graph, the curve represents a relatively price-sensitive demand, and this demand curve is consequently relatively elastic. This is summarized in the following table: Price Change | Elasticity | Change in Total Revenue | Price Increase | Inelastic | Total Revenue Increases | Price Increase | Elastic | Total Revenue Decreases | Price Decrease | Inelastic | Total Revenue Decreases | Price Decrease | Elastic | Total Revenue Increases | Thus, elasticity has to do with price sensitivity. An elastic demand indicates extreme price sensitivity...
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...Principles of Microeconomics December 1, 2013 Phase 2 Individual Project Professor Reddy Urimindi The Price Elasticity of Demand is used to measure how the rate of response of quantity demanded changes due to a price increase or decrease. The formula used to compute the Price Elasticity of Demand (PEoD) is: PEoD = (% Change in Quantity Demanded) / (% Change in Price). To calculate the % change in quantity demanded, we use the formula: QDemand(NEW) - QDemand(OLD) / QDemand(OLD) To calculate the % change in price, we use the formula: Price(NEW) - Price(OLD) / Price(OLD) Elastic goods are sensitive to prices because an increase in price will have a greater influence on demand for that good. Inelastic goods are goods that not very price sensitive and price changes have little influence on their demand. Examples of ineleastic goods are bread, milk, and fuel. These are considered necessities of life and consumer will still buy them regardless of price fluctuations. The higher the price elasticity, the more sensitive consumers are to price changes. A good with a high price elasticity would suggest that when the price of that good goes up, consumers will buy a lot less of it which increases the supply, and when the price of that same good goes down, consumers will buy a lot more of it and decrease the supply. A good with a low price elasticity would mean just the opposite, that changes in price will have little influence on demand. Example 1. The price...
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...[Title Here, up to 12 Words, on One to Two Lines] ECON212-1503B-05 Professor Chavarria CTU Online Author Note Unit 2 Individual Project What is the price elasticity of demand? The price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in it’s price. Price elasticity of demand is often used when discussing price sensitivity. The formula for calculating price elasticity is % change in quantity demanded / % change in price. What is elastic and inelastic demand? Elastic demand is the degree to which a demand or supply curve reacts to a change in price which is the curves elasticity. However; elasticity varies among products because some products are more essential to customers. For instances, products that are more on a necessities level are more insensitive to changes in price because of the fact that costumers are continuing to buy these products. A price increase of a product that is considered less of a necessity will not have customers buy because cost of buying the product will become high. Inelastic demand is used to describe situations in which supply and demand for a good or service is unaffected when the price of that good or service changes. Meaning that when prices go up, costumers buying stays the same, but when price goes down, buying habits also remain unchanged. The price of a laptop increases 20% and there is a 40% decrease in quantity demanded. If...
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...Questions and Answers from Lesson I-7: Elasticity Practice Questions and Answers from Lesson I-7: Elasticity The following questions practice these skills: Use the midpoint method for calculating percent change. Compute price elasticity of demand. Identify elastic and inelastic demand according to the price elasticity of demand. For elastic demand, apply the negative relation between price and revenue. For inelastic demand, apply the positive relation between price and revenue. Remember demand is more elastic when there are more substitutes or closer substitutes. Compute the price elasticity of supply. Compute cross-price elasticities of demand. Relate cross-price elasticities of demand to gross substitutes and gross complements. Identify elastic and inelastic portions of a linear demand curve. Compute income elasticity of demand. Question: Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. Group A (sales per week) 1.55 million 1.65 million Group B (sales per week) 1.50 million 1.70 million Volume of sales before the 10% discount Volume of sales after the 10% discount a. Using the midpoint method, calculate the price elasticities of demand for group A and group B. b. Explain...
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...GM545 Week 3 Quiz Study Guide ------------------------------------------------- TOC-A Chapters 3 & 5 ------------------------------------------------- Given a demand function and a supply function, illustrate how the price mechanism, in response to changes in other demand or supply factors, leads to a new market equilibrium price and level of output. 1. ------------------------------------------------- Explain why the difference between the similar-sounding terms, quantity demanded and demand, is so critical to understanding the model of supply and demand. (P.58) Changes in Demand * Note that a change in demand is different from a change in quantity demanded. * A change in demand occurs when the entire curve shifts. * This means that the quantity demanded at every given price will be different from what it was before. Demand * Demand refers to the quantity of products people are willing and able to purchase during some specific time period, all other relevant factors being held constant. * Price and quantity demanded have an inverse relationship known as the Law of Demand, depicted as a downward-sloping curve. * A market demand is the horizontal sum of all of the individual demand curves. * Demand curves shift when one or more of the determinants of demand change. * The determinants of demand are: consumer tastes and preferences, income, prices of substitutes and complements, the number of buyers in a market, and expectations...
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...1-) (Categories of Price Elasticity of Demand) For each of the following absolute values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic. In addition, determine what would happen to total revenue if a firm raised its price in each elasticity range identified. a) ED = 2.5:elastic b) ED = 0.8:inelastic 2-) (Price Elasticity of Supply) Calculate the price elasticity of supply for each of the following combinations of price and quantity supplied. In each case, determine whether supply is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic in each case. Please give details to your numeric answers. a) Price falls from $2.25 to $1.75; quantity supplied falls from 600 units to 400 units. 200/600= 1/3=33.3/22.2=.667 b) Price falls from $2.25 to $1.75; quantity supplied falls from 600 units to 500 units. 100/600=.1667 / 2.25/1.75=.757 3-) Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why? a) water or diamonds=water b) insulin or nasal decongestant spray=insulin c) food in general or breakfast cereal=food d) gasoline over the course of a week or gasoline over the course of a year = week 4-) Outsourcing Inpatient Care to India The Wall Street Journal, Monday April 26, 2004. Global health care has arrived. During 2003, Canadian resident Terry Salo flew to India to have his hip replaced. He paid only...
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...Problem Set 3 Problem Set 3 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 6. 1. Data for the market for graham crackers is shown below. Calculate the elasticity of demand between the following prices. |Price of crackers |Quantity Demanded (per month) | |$3 |80 | |$2.5 |120 | |$2 |160 | |$1.5 |200 | |$1 |240 | $1.00 - $1.50: Elasticity of demand equals .45; favoring inelasticity $1.50 - $2.00: Elasticity of demand equals .78; favoring inelasticity $2.00 - $2.50: Elasticity of demand equals 1.29; favoring elasticity $2.50 - $3.00: Elasticity of demand equals 2.2; favoring elasticity If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity. The firm should lower their prices 50 cents in an attempt to raise revenues. The elasticity of demand from 2.50-2.00 is 1.29, meaning with a reduction in prices there would be an elastic effect on quantity demanded. The maximum profit would be reached at the price of $2 because of the increased in demand with the price reduction...
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...Supply & Demand and Price Elasticity Paper Supply & Demand/Price Elasticity 2 Introduction The economy is made up of many layers. Each layer has it's own cause and effect that one has to take into account when a buyer is looking to purchase a good or a seller is looking at selling his/her good. Two big variables that control the market are the demand and supply for a good and the elasticity of a good. These two theories show how buyers and sellers interact with one another and how it effects the economic market. Causes of Changed in Supply and Demand If we start with the supply and demand and what causes change we have to look at the fluctuation of the market and the different variables that are taken into account. Within a market you have two groups; the buyers who determine the demand for a product and the sellers who determine the supply of the product (University of Phoenix, 2009). Market demands start with an individuals demand for a good, which consists of the individual's income, the prices of other related goods offered, the buyers tastes and expectations, and also the number of buyers that are purchasing the same good (University of Phoenix, 2009). Another variable that makes the market fluctuate is when the quantity demanded by a buyer who is willing and able to purchase. When there is a high demand for a good then the price for that good falls making the demand curve shift to the right. If there is a low demand for a good then the price for...
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...from 26 supermarkets around the country for the month of April. Below lists two options. 1. Compute the elasticities for each independent variable under both options: Option 1: QD= -5200-42P+20PX+5.2I+.20A+.25M (2.002) (17.5) (6.2) (2.5) (.09) (.21) R2=0.55 n=26 F=4.88 QD=-5200-42(500)+20(600)+5.2(5500)+0.20(10000)+.25(5000)=17,650 sold per month Price Elasticity = -42P/Q= -42*(500/17650) =-1.1898 Income Elasticity = 5.2*(5500/17650)=1.6204 PX Elasticity = 20*(600/17650)=0.6799 Advertising Elasticity = .20(10000/17650)=0.1133 Market Size Elasticity = .25*(5000/17650)=0.0708 Option 2: QD= -2000-100p+15A+25PX+10I (5234)(2.29)(525)(1.75)(1.5) R2=.85 n=120 F=35.25 QD=-2000-100(200)+15(640)+25(300)+10(5000)=45100 sold per month Price Elasticity = -100*(200/45100) = 0.4435 PX Elasticity = 25*(300/45100)=0.1663 Income Elasticity = 10(5000/45100)=1.1086 Advertising Elasticity = 15*(640/45100)=0.2129 2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results: According to Edmund D. McGarry, “As strictly defined by economists, the phrase "elasticity of demand" means the relative flexibility in the amounts of goods which would be taken from the market at various prices at a given time. If we restrict the term elasticity to a given time, it will be seen that only one point on the demand curve can be statistically determined and...
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...extinguished if the price of the product rises or consumer interest rides to infinity if the price falls. In a perfectly elastic demand situation, the responsiveness of demand to a change in price or the price elasticity is infinite.” Price Elasticity of Demand The price elasticity of demand can be applied to a variety of problems in which one wants to know the expected change in quantity demanded or revenue given a contemplated change in price. For example, a state automobile registration authority considers a price hike in personalized “vanity” license plates. The current annual price is $35 per year, and the registration office is considering increasing the price to $40 year in an effort to increase revenue. Because the elasticity is greater than one over the price range of interest, we know that an increase in price actually would decreased the revenue collected by the automomile registration authority, so the price hike would be unwise. Factors influencing the price Elasticity of Demand The price elasticity of demand for a particular demand curve is influenced by the following factors: * Availability of substitutes: the greater the number of substitute products, the greater the elasticity. * Degree of necessity or luxury: luxury products tend to have greater elasticity than necessities. Some products that initially have a low degree of necessity are habit forming and can become “necessities” to some consumer. * Proportion of income required by the item: products...
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...The law of supply indicates that merchants will move more of a product at higher prices and lesser at lower prices. Merchants want to boost their profits, therefore the supply curve is upward sloping. The points where demand and supply curve, the intersection is the point of equilibrium. Demand elasticity and Supply elasticity: Elasticity is a measure of change. It measures the responsiveness of demand and supply to changes in certain variables like price. Demand elasticity: It is the ratio in the change of quantity demanded due to changes in other variables affecting demand.(example - Price). Supply elasticity: It is the percentage change in quantity supplied due to changes in other variables affecting demand.(example - Price). Importance of Demand and Supply analysis: Determination of equilibrium price and quantity. To define the significance of price control and rationing, minimum price fixation, prevalence of taxes, as well as many other economic problems and policies. Importance of Demand and Supply elasticity: To measure the responsiveness of other variables on demand and supply. International trade: A nation may have elastic or inelastic demand for particular products, therefore its imperative to analyze the demand pattern of the products in which the country wants to export and import. Impact of these concepts to the economy, individuals and employers: Impacts the prices of consumer...
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