Supply and Demand: Section 9 Finally getting into Microeconomics
Supply and Demand:Section 9Finally getting into Microeconomics
Behind the CurvesFirst what can shift a supply curve?
ROTTE N
Second, what can shift a demand curve?TRIBE
esourcesther goodsechnologyaxesxpectations (producers)umber of producers
asteelated goodsncomeuyers (number of)xpectations
Substitutes and Complements
What is a substitute?How does this affect/relate demand for a good?
A complement?How does this affect/relate to demand for a good?
Elasticity ExplainedElastic
Consumers are very responsiveWill change purchasing behavior quickly
InelasticConsumers are NOT very responsive
Will not change purchasing behaviors quickly
Unit ElasticConsumer behavior changes directly proportional to price/quantity changes
Consumer ChoiceSubstitution Effect
Prices , DemandOpportunity costsWe substitute the cheaper good for the one we would have purchased = substitution effect
Consumer ChoiceSubstitution effect – has greatest bearing on goods that we rarely purchase
Examples?
Income effectChange in the quantity of a change in the purchasing power of a consumers income
Housing – prices go up, we buy smaller/cheaper housesOther examples?
Consumer ChoiceMost goods are NORMAL goods
Income , demandPeople start to buy inferior goods
Giffen GoodsTheory, never proven
Inferior goods = prices increaseEx: Irish and potatoes
Consumer ChoiceElasticity
Independent/dependent variables and price What else affects a good’s price?
Substitutes and complimentsQuestion to ask:
NOT IF a dependent good (compliment) will change due to price increases BUT how much will the quantity demanded decrease/increase?
Elasticity – measure how responsive the quantity demanded is to a change in price
Consumer ChoicePrice elasticity of demand
Flu shot vaccine example
Time to do research!
Consumer ChoiceMagic number with Elasticity is 1
Below 1 – inelasticDemand will change a relatively small amount when price changes
Examples:GasHealth careFlu shotsCrack rocks?
Above 1 – elasticDemand will change in greater amounts if price changes
Examples:Restaurant mealsHousingForeign Travel
1 = unit elastics
Consumer ChoiceInterpreting Price Elasticity of Demand
How elastic IS elastic?Perfectly inelastic
No matter the price of a good, the quantity demand stays
Consumer GoodsPerfectly elastic
A tiny price change will cause the quantity demanded to change
Consumer ChoiceWhy does the elasticity of a good matter?
Crucial to know how price changes affect TOTAL REVENUE = P x Q sold
Consumer ChoiceBesides rare cases of perfectly inelastic or perfectly elastic goods, two effects are important and can be found using elasticity
Price effect – Price = price, raises revenueQuantity Effect – Price = products sold, lowers revenue
Consumer ChoicePrice elasticity of demand tells us what happens when price changes, and the size of that effect
Unit-elastic (price elasticity of d = 1)Increase in price does not change total revenue
Inelastic (price elasticity of d < 1)Higher price increases total revenuePrice effect is stronger than quantity effect
Elastic (price elasticity of d > 1)Increase in price reduces revenueQuantity effect is stronger than price effect
Consumer ChoiceWhat factors determine the price elasticity of demand?
Are close substitutes available?Ex: difference between Pepsi and Coke
Is the good a necessity or luxury?Ex: Ferrari
What share of income is spent on the good?Ex: Starbucks
TimeEx: Gas crisis in the 1970s
Thinking about what we know about economics so far…
Should price elasticity affect a person’s choice of college?
Consumer ChoiceFurther Elasticities of Demand (and Supply)
Demand for a good is often affected by the price of other, related goods
If a price changes for hot dogs, how much does this affect demand for hamburgers?
Cross-Price Elasticity for Demand = %∆ Qd for Good A%∆ in Price of B
o When two goods are substitutes, Cross-Price Elasticity is Positive (shift demand curve of Good B to the right)
o When goods are compliments, hot dogs and hot dog bunds, CPE is negative (shift left of Good B)
**The (+) or (-) sign matters here**
Consumer ChoiceIncome Elasticity of Demand
Changes in income affect a good = %∆ in Qd %∆ in income
o Income Elasticity is (+) – Normal goodo Income Elasticity is (-) – Inferior good
o Income Elasticity (normal goods)o Income – elastic (>1)
o If income rises, the demand for a good rises FASTER than rise in income
o Income – inelastic (<1 but >0)o When income rises, the demand for a good is SLOWER
than rise in income
Consumer ChoicePrice Elasticity of Supply
The response of producers to price changesExamples – produce more products, reduce production
Price Elasticity of Supply = %∆ in Qs %∆ in price
o Same rules as Demand Elasticities, just along the supply curve
Consumer Choice
Consumer ChoiceWhat factors determine the Price Elasticity of Supply?
Availability of inputsToo few inputs means higher cost of production
TimeResponse of producers to inputs, prices
Ex – Fish supply, pizza, cell phone radio spectrum