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P
P
Q
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P
Chapter 2 46
Elasticity: An Application
During the 1980s and 1990s, the market
for wheat went through changes that had
great implications for American farmers
and US agricultural policy
Using the supply and demand curves for
wheat, we can analyze what occurred in
this market
Chapter 2 47
Elasticity: An Application
Supply: Q
S
= 1900 + 24P
Demand: Q
D
= 3550 266P
Chapter 2 48
Elasticity: An Application
Q
D
= Q
S
1800 + 240P = 3550 266P
506P = 1750
P = $3.46 per bushel
Q = 1800 + (240)(3.46) = 2630 million
bushels
Chapter 2 49
Elasticity: An Application
We can find the elasticities of demand
and supply at these points
035 . ) 266 (
630 , 2
46 . 3
= =
A
A
=
P
Q
Q
P
E
D
D
P
032 . ) 240 (
630 , 2
46 . 3
= =
A
A
=
P
Q
Q
P
E
S
S
P
Chapter 2 50
Elasticity: An Application
Assume the price of wheat is
$4.00/bushel due to decrease in supply
486 , 2 ) 00 . 4 )( 266 ( 550 , 3 = =
D
Q
43 . 0 ) 266 (
486 , 2
00 . 4
= =
D
P
E
Chapter 2 51
Elasticity: An Application
In 2002, the supply and demand for
wheat were:
Supply: Q
S
= 1439 + 267P
Demand: Q
D
= 2809 226P
Chapter 2 52
Elasticity: An Application
Q
D
= Q
S
2809 - 226P = 1439 + 267P
P = $2.78 per bushel
Q = 2809 - (226)(2.78) = 2181 million
bushels
Price of wheat fell in nominal terms.
Chapter 2 53
Short-Run Versus Long-Run
Elasticity
Price elasticity varies with the amount of
time consumers have to respond to a
price
Short-run demand and supply curves
often look very different from their long-
run counterparts
Chapter 2 54
Short-Run Versus Long-Run
Elasticity
Demand
In general, demand is much more price
elastic in the long run
Consumers take time to adjust consumption
habits
Demand might be linked to another good that
changes slowly
More substitutes are usually available in the
long run
Chapter 2 55
Gasoline: Short-Run and Long-Run
Demand Curves
D
SR
D
LR
People cannot easily
adjust consumption in
the short run.
In the long run, people
tend to drive smaller and
more fuel efficient cars.
Quantity of Gas
Price
Chapter 2 56
Short-Run Versus Long-Run
Elasticity
Demand and Durability
For some durable goods, demand is more
elastic in the short run
If goods are durable, then when price
increases, consumers choose to hold on to
the good instead of replacing it
But in long run, older durable goods will have
to be replaced
Chapter 2 57
D
SR
D
LR
Initially, people may put
off immediate car
purchase
In long run, older cars
must be replaced
Cars: Short-Run and Long-Run
Demand Curves
Quantity of Cars
Price
Chapter 2 58
Short-Run Versus Long-Run
Elasticity
Income elasticity also varies with the
amount of time consumers have to
respond to an income change
For most goods and services, income
elasticity is larger in the long run
When income changes, it takes time to
adjust spending
Chapter 2 59
Short-Run Versus Long-Run
Elasticity
Income elasticity of durable goods
Income elasticity is less in the long run than
in the short run
Increases in income mean consumers will want
to hold more cars
Once older cars are replaced, purchases will
only be to replace old cars
Less purchases from income increase in long
run than in short run
Chapter 2 60
Short-Run Versus Long-Run
Elasticity
Most goods and services:
Long-run price elasticity of supply is greater
than short-run price elasticity of supply
Other Goods (durables, recyclables):
Long-run price elasticity of supply is less
than short-run price elasticity of supply
Chapter 2 61
S
SR
Quantity Primary Copper
Price
Short-Run Versus Long-Run
Elasticity
S
LR
Due to limited
capacity, firms
are limited by
output constraints
in the short run.
In the long run, they
can expand.
Chapter 2 62
S
SR
Quantity Secondary Copper
Price
Short-Run Versus Long-Run
Elasticity
S
LR
Price increases
provide an incentive
to convert scrap
copper into new supply.
In the long run, this
stock of scrap copper
begins to fall.
Chapter 2 63
Short-Run vs. Long-Run
Elasticity An Application
Why are coffee prices very volatile?
Most of the worlds coffee is produced in
Brazil
Many changing weather conditions affect the
crop of coffee, thereby affecting price
Price following bad weather conditions is
usually short-lived
In long run, prices come back to original
levels, all else equal
Chapter 2 64
Price of Brazilian Coffee
Chapter 2 65
Short-Run vs. Long-Run
Elasticity An Application
Demand and supply are more elastic in
the long run
In the short run, supply is completely
inelastic
Weather may destroy part of the fixed
supply, decreasing supply
Demand is relatively inelastic as well
Price increases significantly
Chapter 2 66
D
P
0
S
Q
0
Quantity
Price
A freeze or drought
decreases the supply
of coffee
S
Q
1
An Application - Coffee
Price increases
significantly due to
inelastic supply and
demand
P
1
Chapter 2 67
S
D
S
P
0
Q
0
P
2
Q
2
Intermediate-Run
1) Supply and demand are
more elastic
2) Price falls back to P
2
.
An Application - Coffee
Quantity
Price
Chapter 2 68
S
P
0
Q
0
Long-Run
1) Supply is extremely elastic
2) Price falls back to P
0
.
3) Quantity back to Q
0.
An Application - Coffee
Quantity
Price
D
Chapter 2 69
Effects of Price Controls
Markets are rarely free of government
intervention
Imposed taxes and granted subsidies
Price controls
Price controls usually hold the price
above or below the equilibrium price
Excess demand shortage
Excess supply surplus
Chapter 2 70
D
Effects of Price Controls
Quantity
Price
P
0
Q
0
S
P
max
Price is regulated to
be no higher than P
max
Quantity supplied
falls and quantity
demanded increases
A shortage results
Q
S
Q
D
Shortage
Chapter 2 71
Effects of Price Controls
Excess demand sometimes takes the
form of queues
Lines at gas stations during 1974 shortage
Sometimes get curtailments and supply
rationing
Natural gas shortage of the mid 70s
Producers typically lose, but some
consumers gain. Some consumers lose.