Beruflich Dokumente
Kultur Dokumente
(10/10/2014
11:00-12:20):
Zhi
Li,
TA
Section
BD
zhili@uw.edu
TTh
3-4pm:
Savery
319F
All
the
other
times:
Fishery
Sciences
Building
238B
Outline:
1. Elasticity
a. Price
elasticity
of
demand:
definition
by
words
and
formula
b. Elastic
and
inelastic:
characteristics,
determinants,
graphs,
along
a
linear
demand
curve
c. Price
changes
and
total
revenues
(def.)
d. Other
elasticity:
cross-price,
income
e. Elasticity
of
supply:
determinants
2. Consumer
and
producer
surplus
a. Definition
b. Derive
demand
curve
c. Marginal
benefit
and
cost
d. Surplus
in
a
market
Some
Definitions
Price
elasticity
of
demand
measures
responsiveness
of
quantity
demanded
to
price
changes
in
terms
of
percentage
changes
Price elasticity of demand =
Midpoint
formula
Price elasticity of demand =
(Q2 Q1 ) ( P2 P1 )
Q1 + Q2 P1 + P2
2 2
Demand
is
price
elastic
if
its
price
elasticity
of
demand
is
larger
(in
absolute
value)
than
1.
So
a
10%
increase
in
price
would
result
in
a
greater
than
10%
decrease
in
quantity
demanded.
Demand
is
price
inelastic
if
its
price
elasticity
of
demand
is
smaller
(in
absolute
value)
than
1.
That
is,
close
to
zero,
indicating
that
quantity
demanded
changes
little
in
response
to
a
price
change.
Demand
is
unit
price
elastic
if
the
price
elasticity
of
demand
is
exactly
equal
to
(negative)
1.
A
vertical
demand
curve
means
that
quantity
demanded
does
not
change
as
price
changes.
So
elasticity
is
zero.
A
vertical
demand
curve
is
perfectly
inelastic.
A
horizontal
demand
curve
means
quantity
demanded
is
infinitely
responsive
to
price
changes.
Elasticity
is
infinite.
A
horizontal
demand
curve
is
perfectly
elastic.
Total
revenue:
The
total
amount
of
funds
received
by
a
seller
of
a
good
or
service,
calculated
by
multiplying
the
price
per
unit
by
the
number
of
units
sold.
Consumer
surplus
is
the
difference
between
the
highest
price
a
consumer
is
willing
to
pay
for
a
good
or
service
and
the
actual
price
the
consumer
receives.
Consumer
surplus
measures
the
net
benefit
to
consumers
from
participating
in
a
market
rather
than
the
total
benefit.
Producer
surplus
is
the
difference
between
the
lowest
price
a
firm
would
be
willing
to
accept
for
a
good
or
service
and
the
price
it
actually
receives.
Producer
surplus
measures
the
net
benefit
received
by
producers
from
participating
in
a
market
Marginal
benefit,
the
additional
benefit
to
a
consumer
from
consuming
one
more
unit
of
a
good
or
service.
Marginal
cost:
the
additional
cost
to
a
firm
of
producing
one
more
unit
of
a
good
or
service.
Consumer
surplus
in
a
market
is
equal
to
the
total
benefit
received
by
consumers
minus
the
total
amount
they
must
pay
to
buy
the
good
or
service.
Producer
surplus
in
a
market
is
equal
to
the
total
amount
firms
receive
from
consumers
minus
the
cost
of
producing
the
good
or
service.
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Exercises
1. Over the past 60 years, there is a rapid increase in farm productivity in the wheat market. The average
income of consumers is also much higher than before.
What happens to the equilibrium price and quantity in the wheat market if
Demand for wheat is inelastic;
Income elasticity of demand is low.
Illustrate your answer with a demand and supply graph.
2. Due to unfavorable weather conditions, there has been a reduction in the quantity of California oranges
produced this year. However the orange growers have reported an increase in their total revenues. Some
commentators have questioned the validity of this report, expressing skepticism that a smaller crop of
oranges should be worth more than a larger crop.
a) Use supply and demand curves to describe what happened in the orange market.
b) Use relevant economic concepts to evaluate the commentators skepticism.
The graph is similar to the one above except that the supply shifts to the left.
The demand for oranges must be inelastic (the absolute value of the price elasticity of demand for oranges
is less 1). In this case, the percentage decline in quantity of orangesdue to unfavorable weather in
California-- results in a larger percentage increase in the price of oranges. Therefore the total revenues of
the sellers/growers (i.e. the new PxQ) will rise.
3. Pat runs a sandwich shop (Pats Sandwiches) in a Seattle neighborhood. He decides to increase the
price of his sandwiches one day. At the end of that day, Pat finds that the shop indeed earned more
revenues. Pat is pleased and decides to keep the new higher price. At the end of the month, however, he
discovers that his revenues are way down. What is going on?
The difference between higher earnings in the short run and lower earnings in longer run has to do with
the differences in the price elasticity of demand in the short versus long run. In the short run (a day) the
demand for sandwiches at Pats Sandwiches is inelastic. Therefore as Pat raises the price of sandwiches,
his revenues rise. You can say that Pats regular customers are not able to find close substitutes to Pats
sandwiches in a day. However, given a month, the customers will find cheaper substitutes for Pats
sandwiches. Over time they may switch away from Pats shop to other restaurants. Therefore it is possible
that over a month Pat would lose a lot of customers (elastic demand). This implies that over a month, as he
increases his price, his revenues would fall.
Refer to the graph below. When market price is $2.00, how much is the
producer surplus obtained from selling all 50 cups?
$1.00