Beruflich Dokumente
Kultur Dokumente
Overview:
▪Impersonal market
▪No haggling, bluffing, or other forms of strategic behaviour
to influence prices.
Econ 203 Chapter 4 page 3
This sensitivity measures how much the firm’s total revenue will
change in response to a price change.
Price
At the lower price, the
firm can sell more
P1 A units and TR increases.
B
P2
Demand
0 Q1 Q2 Quantity
Suppose price falls: At the new lower price of P2, the quantity
demanded is Q2. → Total revenue is P2×Q2.
In this case, total revenue increases, but this is not always the case.
Econ 203 Chapter 4 page 6
(2) unitary elastic if total revenue does not change when the price
changes.
Q
Q Q P
P Point Elasticity of Demand
P P Q
P
Q P
P
P Q
Figure 1:
Demand Curve With Zero Price Elasticity of Demand
Price
Demand Curve
0 Quantity
Demand curve has a price elasticity of zero: εp =0.
Quantity demanded is unaffected by price.
Example: Insulin
Econ 203 Chapter 4 page 10
Figure 2:
Demand Curve with Infinite Price Elasticity of Demand
Price
Nothing can be
sold if the price
Demand Curve if the price is
increased
slightly.
0 Quantity
Figure 3:
Values of the Price Elasticities Of Demand Along a Linear Demand Curve
Price
εp is inelastic
Demand
0
MR εp If demand is price
$, TR Max TR elastic, MR is positive
and as Quantity
increases, TR increases
00 Q* Quantity
Econ 203 Chapter 4 page 12
Q
(Q1 Q2 ) 2 Q P1 P2
εp p
P P Q1 Q2
( P1 P2 ) 2
Econ 203 Chapter 4 page 13
Just like the point elasticity of demand, the arc elasticity of demand
has three possible outcomes:
Price
C B
P2
P1 A
DL Long-Run Demand
DS Initial Demand
0 Q3 Q2Q1 Quantity
Qy
P1
P2
P3
0 X1 X2 X3 Qx
Econ 203 Chapter 4 page 23
D0 D1
I1
A
I0
0 X1 X2 QA X1 X2 QA
Econ 203 Chapter 4 page 26
When the price of a good changes and the quantity demanded of another
good changes in the same direction, with the price of the other good held
constant, the two goods are referred as substitute goods.
QB PA
D1 D0
B Px
I1
A
I0
0 X2 X1 QA X2 X1 QA
Examples:
IBM computers and Dell computers
Econ 203 Chapter 4 page 27
E BPA A A
PA B1 B2
Econ 203 Chapter 4 page 28
The only difference with this equation with the arc price elasticity
of demand is that the change in the quantity of A has been replaced
by the change in the quantity of B, and the sum of the units of A by
the sum of the units of B.
B
If A and B are complements, then PA is negative and the arc cross
price elasticity of demand is negative.
B
If A and B are substitutes, then PA is positive and the arc cross
price elasticity of demand is positive.
Econ 203 Chapter 4 page 29
2) Consumer Surplus
Marginal Value
Econ 203 Chapter 4 page 30
So:
I-C Curve
B
S1
A I1
S0
I0 BL1
BL0
X0 X1 Units of X
X1 Examples: Fruit
Fresh meat
X0
Income
M0 M1
Econ 203 Chapter 4 page 38
S1 B
I1
BL0
S0 A BL1
I0
X1 X0 Units of X
Units of X
Examples:
X0 Hamburger
used cars
used shoes
X1 Engel Curve
Income
M0 M1
Qx
QX Qx M
M
Income M QX
M
Econ 203 Chapter 4 page 42
M
QX 0 QX 1 2 Qx M 0 M1
Income M QX 0 QX 1
M 0 M1 2
Econ 203 Chapter 4 page 43
Examples: Vacations
Econ 203 Chapter 4 page 44
Examples: food
Clothing
Soap
Econ 203 Chapter 4 page 45
Substitution Effect:
Other Goods
S0 A
BL1
S1 BL0 B
I
BL2
0 X0 X1 Units of X
Sub. Effect
Price
Other Goods P2
P1 d
X1 X2 Price decrease:
B
A
I1
C
BL1
BL0
I0
BL2
0 X0 X1 X2 Units of X
Econ 203 Chapter 4 page 51
Price
d
Other Goods P0
P1
X2 X0
I1
BL2
A
C BL1
BL0 I0
0 X2 X0 X1 Units of X
The price of X falls and the budget constraint rotates out to BL1
Econ 203 Chapter 4 page 55
The total change from the decrease in the price of good X can
be separated into two components:
Other Goods P0
P1
d
X0 X2
B
I1
A
BL2
C BL1
BL0 I0
0 X0 X0 X1 Units of X
Econ 203 Chapter 4 page 60
X
P can be determined by measuring how the quantity
demanded changes along an indifference curve as the relative
price of the good X changes.
When the price of the good falls, the amount of income available
to spend on goods is equal to:
M ( P) X
Looking at this expression, the greater is the change in income the
larger is the amount of X the consumer is currently consuming.
X
M equals the increase in the quantity demanded of X per dollar
increase in income.
X X X
X
P P U c M Slutsky Equation
Consumer Surplus
$1.75 $1.50
$0.75
0 20 35 Quantity
Econ 203 Chapter 4 page 71
Discriminatory pricing!
0 5 15 Quantity