Demand

and Supply
Price Distor+ons and Elas+ci+es

Price Distortions
An economic scenario that occurs
when there is an intervention in
a given market by a governing
body

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S
The government will
the price of the good.

Pe
D
Qe

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Pe
D
Qe

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Price Floor creates

low

Pe
D
Qe

D S

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S
Example:
Pe
D
Qe

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S
Example:
Pe
D
Qe

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Pe
D
Qe

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Pe
D
Qe

Can the market adjust to a

new market equilibrium where
the Equilibrium Price becomes
the Price Floor?

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Pe
D
Qe

milk

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Pe
D
Qe

milk

Price Distortions
minimum price
sellers can charge

to protect the sellers

The government thinks that the Equilibrium Price

is
.
S

Pe
D
Qe

milk

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S
The government will
the price of the good.

Pe

D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S

Pe

D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S

Price Ceiling creates

Pe

D S
D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S
Example:
Pe

D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S

Can the market adjust to a

new market equilibrium where
the Equilibrium Price becomes
the Price Ceiling?

Pe

D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S

Pe

D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S

Pe

D
Qe

Price Distortions
maximum price
sellers can charge

to protect the buyers

The government thinks that the Equilibrium Price

is
.
S

Pe

D
Qe

Elasticities
ECONONE

Elasticity

Price of
the Good

to

Income

to

Price of
Related
Goods

to

Qd

Elasticity
Change in
the Price
of the
Good

to

Elasticity
Change in
the Price
of the
Good

Why do we need
to measure price
elas+city?

to

PRODUCERS POINT OF VIEW:

To know the impact of price changes
to revenues.

Elasticity
Change in
the Price
of the
Good

Is it always
protable to
increase the price
of the good?

to

PRODUCERS POINT OF VIEW:

It depends on the price elas+city of
demand of your product.

Elasticity
The responsiveness of Qd to changes in P

or
Midpoint Formula

If Ped > 1

ELASTIC

The change in Qd is
greater than the
change in Price

If Ped < 1

INELASTIC

The change in Qd is less
than the change in
Price

If Ped = 1

UNIT-ELASTIC

The change in Qd is
equal to the change in
Price

Elasticity
The responsiveness of Qd to changes in P

ELASTIC

P Q Revenue
1 100 100
2 40 80

As P , Qd and R

As P , Qd and R

INELASTIC P Q Revenue

As P , Qd and R

As P , Qd and R

Ped > 1

Ped < 1

10 4 40
15 3 45

UNIT-
ELASTIC

P Q Revenue
25 4 100
50 2 100

Ped = 1

As P , Qd and R is constant

As P , Qd and R is constant

Elasticity
The responsiveness of Qd to changes in P

ELASTIC
Ped > 1

P Q Revenue
1 100 100
2 40 80

As P , Qd and R
As P , Qd and R

YOU NP EED
TO
K NOW
THE PRICE
EPLASTICITY
OR
F
As

,
Q
d

and








Q





R
evenue
INELASTIC
RODUCT SO
As Y
P OULL
, Qd K aNOW
nd R
10 O
4F Y
OUR
4P0
Ped < 1 DEMAND
DECREASE WILL BE
IF A 15
PRICE
3 I NCREASE
45 OR

PROFITABLE
FOR
YP OU.
As
, Qd and R is constant
P








Q








R
evenue
UNIT-
As P , Qd and R is constant
25 4 100
ELASTIC

Ped = 1

50 2 100

Elasticity
The responsiveness of Qd to changes in P

Solve for the Ped and determine its classica+on.

1.

P
4
5

Q
50
20

2.

P
1
3

Q
100
80

Elasticity
The responsiveness of Qd to changes in P
P
INELASTIC
P

Qd
D

ELASTIC
a+er curve

Qd
steeper curve

Qd
UNIT-ELASTIC
constant slope

Elasticity
The responsiveness of Qd to changes in P

DETERMINANTS SUBSTITUTABILITY
M

substitutes
GOOD
F

E
substitutes

Elasticity
The responsiveness of Qd to changes in P

DETERMINANTS

NEED/IMPORTANCE IN BUDGET
LUXURIES/NOT IMPT

GOOD

NEED/IMPT

Elasticity
The responsiveness of Qd to changes in P

DETERMINANTS

DEFINITION OF THE MARKET

BROAD

GOOD

NARROW

Elasticity
The responsiveness of Qd to changes in P

DETERMINANTS

TIME
LONGER TERM

GOOD

SHORTER TERM

Elasticity

Change
in
Income

to

Is the good normal or inferior?

Elasticity
The responsiveness of Qd to changes in Y

or
Midpoint Formula

If Yed > 1

ELASTIC

The good is NORMAL.

If Yed < 1

INELASTIC

The good is INFERIOR.

If Yed = 1

UNIT-ELASTIC

The good is neither
normal nor inferior.

Elasticity
The responsiveness of Qd to changes in Y

Solve for the Yed and determine its classica+on.

1.

Y
20,000
30,000

Qd
100
400

2.

Y
50,500
100,000

Qd
200
50

Elasticity

Are the two goods subs+tutes or complements?

Change in
the Price of
Related
Goods

to

Qd

Elasticity
The responsiveness of Qd2 to changes in Qd1

or
Midpoint Formula

If Ced > 0

ELASTIC

The two goods are
SUBSTITUTES.

If Ced < 0

INELASTIC

The two goods are
COMPLEMENTS.

Elasticity
The responsiveness of Qd2 to changes in Qd1

Solve for the Ced and determine its classica+on.

1.

Qd1
100
130

Qd2
150
200

2.

Qd1
100
200

Qd2
250
400