8uslness Lconomlcs unlL 1

unl1 1
ln18CuuC1lCn
Lconom|cs
uerlved from Lhe Creek word olkvomla"
Clkvomla 8ule of household MaL of
household
Lconomlcs ls Lhe sclence LhaL deals wlLh human
wanLs and saLlsfacLlon
conomics ls Lhe sLudv of Lhe maklna buvlna
and selllna of aoods or servlces
ln18CuuC1lCn
|n|t|on
Lconomlcs ls deflned as fn |nqu|ry |n to th
nftur fnd cfus o wfth"
lL ls Lhe sLudv of manufacLurlna ulsLrlbuLlon
consumpLlon of producLs servlces ln an economv
lL ls broadlv dlvlded lnLo
1 Macro Lconomlcs
2 Mlcro Lconomlcs
ln18CuuC1lCn
us|nss Lconom|cs
us|nss conom|cs ls LhaL parL of economlc Lheorv
whlch focuses on buslness enLerprlses and lnqulres
lnLo Lhe facLors conLrlbuLlna Lo Lhe dlverslLv of
oraanlzaLlonal sLrucLures and Lo Lhe relaLlonshlps of
flrms wlLh labour caplLal and producL markeLs
Micro and Macro Economic
Variables
unl1 1
Macroeconomlcs vs Mlcroeconomlcs
MCROECONOMC
QUESTON
MACROECONOMC
QUESTON
Go to business schooI
or take a job?
How many peopIe are
empIoyed in the
economy as a whoIe?
What determines the
saIary offered by
Citibank to Cherie
Camajo, a new
CoIumbia MBA?
What determines the
overaII saIary IeveIs
paid to workers in a
given year?
Nicroeconomics focuses on how decisions are
made by individuals and firms and the
consequences of those decisions.
Ex.: How much it would cost for a university or
college to offer a new course the cost of the
instructor's salary, the classroom facilities, the
class materials, and so on.
Having determined the cost, the school can then
decide whether or not to offer the course by
weighing the costs and benefits.
Microeconomics
Microeconomics
Definitions:
Microeconomics is the study oI how individuals and Iirms
make themselves as well oII as possible in a world oI
scarcity and the consequences oI those individual
decisions on the markets and the entire economy.
Microeconomics is the study oI the allocation oI scarce
resources.
It is the study oI economic elements at the level oI the
household or the company
Mircoeconomics is also oIten called price theory.
This is to emphasize the important role that price plays.
Price not only thing studied think oI health care market
%ools of Microeconomic Analysis
. Constrained Maximization
2. Equilibrium Analysis
3. Comparative Statics
.Constrained Optimization
ConsLralned opLlmlzaLlon an analvLlcal Lool
used when a declslon maker seeks Lo make
Lhe besL (opLlmal) cholce Laklna lnLo
conslderaLlon posslble resLrlcLlons on Lhe
cholce
ConsLralned CpLlmlzaLlon
1hls Lool has Lwo parLs
1 Cb[ecLlve funcLlon ls Lhe relaLlonshlp Lhe
declslon maker seeks Lo opLlmlze (maxlmlze
or mlnlmlze)
2 ConsLralnL llmlLs or resLrlcLlons LhaL are
lmposed on Lhe declslon maker
ConsLralned CpLlmlzaLlon
Lxamples
?ou wanL Lo maxlmlze vour happlness durlna
vour second vear aL Cu
- Cb[ecLlve funcLlon
Papplnessf(davs skled per monLh beers per week)
- ConsLralnLs sL (sub[ecL Lo)
lncome Llme for lelsure
Maralnal Analvsls
SoluLlon Lo a consLralned opLlmlzaLlon problem depends
on Lhe maralnal lmpacL of Lhe declslon varlables on Lhe
value of Lhe ob[ecLlve funcLlon
ut whft |s mfrg|nf"
1he Lerm mfrg|nf Lells us how Lhe value of Lhe ob[ecLlve
funcLlon chanaes as a resulL of addlna one unlL of a
declslon varlable
Maralnal Analvsls
Happiness
$
spent
From
beer
From
skiing
0 0 0
25 80 4
50 90 10
75 92 15
100 94 20
MarginaI Happiness
From
beer
From
skiing
80 4
10 6
2 5
2 5
Maralnal Analvsls
$100 on beer 94 unlLs of happlness
$73 beer plus $23 skllna 96 unlLs of
happlness
$30 on beer and $30 on skllna 100 unlLs of
happlness
?es a dav of skllna wlLh a nlce apres skl makes vou
verv happv
Maralnal Analvsls
?ou [usL dld a consLralned opLlmlzaLlon
problem
CpLlmlze happlness (beer and skllna) sub[ecL Lo
vou $100 weeklv enLerLalnmenL budaeL
Max P(8 S) sL s*S + b*8100
Where 8 quanLlLv of beer bprlce beer
Sdavs of skllna sprlce skllna
Lqulllbrlum Analvsls
!rice (!
Doctors visit
Quantity (Q
umber of appointments
per day
10
P*
Q
d:
demand
Q
s
SuppIy
Equilibrium: Q
d
=Q
s
50
25
Q1 Q2
Excess
Demand
Lqulllbrlum Analvsls
ln a compeLlLlve markeL equlllbrlum ls
achleved aL a prlce aL whlch Lhe markeL clears
LhaL ls aL a prlce aL whlch Lhe quanLlLv
offered for sale [usL equals Lhe quanLlLv
demanded bv consumers
Slnce ;

aL 9* Lhere ls no upward or
downward pressure on prlce Pence prlce
could sLav aL 9* lndeflnlLelv
Lqulllbrlum Analvsls
50
8
Q
d:
demand
Q
s
SuppIy
13
70
Excess Supply
Quantity (Q
umber appointments
per day
!
!rice ($
Doctors visit
Lqulllbrlum Analvsls
50
5
Q
d:
demand
Q
s
SuppIy
13
70
Excess Demand
30
!
!rice ($
Doctors visit
Q Quantity
umber of appointments
per day per doctor
ComparaLlve SLaLlcs
Lxamlne how a chanae ln an exoaenous
varlable wlll affecL Lhe level of an endoaenous
varlable
llrsL look aL Lhe value of Lhe endoaenous varlable
aL Lhe lnlLlal level of Lhe exoaenous varlable
Second look aL Lhe value of Lhe endoaenous
varlable aL Lhe new level of Lhe exoaenous
varlable
1ools o Microeconomic Analvsis
1 Constrained Maximization
2 Equilibrium Analysis
3 Comparative Statics
onstrained Optimization
Constrained optimization: an analytical tool
used when a decision maker seeks to make
the best (optimal) choice, taking into
consideration possible restrictions on the
choice
onstrained Optimization
This tool has two parts:
1 Objective function: is the relationship the
decision maker seeks to optimize
(maximize or minimize)
2 Constraint: limits or restrictions that are
imposed on the decision maker
onstrained Optimization
Lxamples
ou want to maximize your happiness during
your second year at CU
Objective function:
Happiness=f(days skied per month, beers per week)
Constraints: st (subject to)
ncome, time for leisure
Marginal Analvsis
Solution to a constrained optimization problem
depends on the marginal impact of the decision
variables on the value of the objective function
But what is marginaI?
The term marginaI tells us how the value of the
objective function changes as a result of adding one
unit of a decision variable
Marginal Analvsis
Happiness
$
spent
From
beer
From
skiing
0 0 0
25 80 4
50 90 10
75 92 15
100 94 20
MarginaI Happiness
From
beer
From
skiing
80 4
10 6
2 5
2 5
Marginal Analvsis
100 on beer = 94 units of happiness
75 beer plus 25 skiing = 96 units of
happiness
50 on beer and 50 on skiing = 100 units of
happiness
es a day of skiing with a nice apres ski makes
you very happy
Marginal Analvsis
ou just did a constrained optimization
problem
Optimize happiness (beer and skiing) subject to
you 100 weekly entertainment budget
Max H(B, S) st Ps*S + Pb*B=100
Where B= quantity of beer; Pb=price beer
S=days of skiing; Ps=price skiing
Lquilibrium Analvsis
!rice (!
Doctors visit
Quantity (Q
umber of appointments
per day
10
P*
Q
d:
demand
Q
s
SuppIy
Equilibrium: Q
d
=Q
s
50
25
Q1 Q2
Excess
Demand
Lquilibrium Analvsis
n a competitive market, equilibrium is
achieved at a price at which the market
clears that is, at a price at which the
quantity offered for sale just equals the
quantity demanded by consumers
Since Q
d
= Q
s
at P*, there is no upward or
downward pressure on price Hence, price
could stay at P* indefinitely
Lquilibrium Analvsis
50
8
Q
d:
demand
Q
s
SuppIy
13
70
Excess Supply
Quantity (Q
umber appointments
per day
!
!rice ($
Doctors visit
Lquilibrium Analvsis
50
5
Q
d:
demand
Q
s
SuppIy
13
70
Excess Demand
30
!
!rice ($
Doctors visit
Q Quantity
umber of appointments
per day per doctor
omparatie Statics
Examine how a change in an exogenous
variable will affect the level of an endogenous
variable
irst, look at the value of the endogenous variable
at the initial level of the exogenous variable
Second, look at the value of the endogenous
variable at the new level of the exogenous
variable
omparatie Statics Lxample
!
!rice ($
Doctors visit
Q
umber of appointments
per day per doctor
10
P*
D
S
50
Q*
omparatie Statics Lxample
Suppose we are in China and there is an
outburst of the Avian lu A few weeks later
there are some new regulations put on
doctors and they are unhappy about it So
they do a rotating strike
How will these factors affect our Supply and
Demand curve and the price?
omparatie Statics Lxample
!
!rice ($
Doctors visit
Q
umber of appointments
per day per doctor
10
P
1
D
1
S
1
50
D
2
Outbreak of avian flu,
P
2
60
13
Q
1
Q
2
Moves demand to the right,
but supply curve does not
change
omparatie Statics Lxample
!
!rice ($
Doctors visit
Q
umber of appointments
per day per doctor
D
1
S
1
D
2
The rotating strike wiII Iead to
P
3
65
11
S
2
A reduction in supply
This is a shift to the left
Q
3
ComparaLlve SLaLlcs Lxample
!
!rice ($
Doctors visit
Q
umber of appointments
per day per doctor
10
P*
D
S
50
Q*
ntroduction:
acro is long or large
Enlarged S elongated one due to combinations.
!t is a study of overall conditions like total
production of the economy, price level investment
etc.,
,.740.4342.8
Nacro Economics:
!t is the study of country's economy using
element as
memployement
Price Levels
Covernment Spending
!nterest rate
National Productivity
Covt. Policy
,.740.4342.8
efinition:
acro economics deals with the behaviour of
aggregate like gross national product S the level of
employment.
acro economics deals with economic affairs at
large. !t concerns the overall dimensions of
economics life
,.740.4342.8
Nacrostatic
2 Nacro Comparative static
3 Nacro namics
%50841,.740.4342.8
Nacrostatic
t is an equilibrium point of macro
economic variable at a given point of time
Final equilibrium as explained b the
equation
Y=C++C
C - Consumption
- nvestment
C - Covt Expentiture
%50841,.740.4342.8
2 Nacro Comparative static:
f a comparison of two macro static points
at a given point of time is done it is called
Nacro comparative static analsis
3 Nacro namic:
t explains the process of change or path
of change between initial equilibrium to
the new equilibrium
%50841,.740.4342.8
!t helps the government in formulating S
implementing economic policies
!t deals with economic problems
nemployement
!nflation
Depression
Recession
!ncrease National economy
03019841,.740.4342.8
!t cannot be precise because of the
heterogeneous elements
Too much of aggregation will make the analysis
quite unintelligable (ex:ango + car)
Composition of aggregate may be imperfect
29,94341,.740.4342.8
Mlcro versus Macroeconomlcs
WhaL ls Lhe dlfference beLween mlcro and
macro economlcs?
Mlcroeconomlcs behavlor of lndlvldual economlc
unlLs llke consumers producers landowners
famllles eLc Pow and whv do Lhev make Lhe
declslons Lhev make?
Macroeconomlcs analvzes how Lhe enLlre
naLlonal economv performs lL analvzes
unemplovmenL lnflaLlon prlce levels lnLeresL
raLes (manv Lhlnas we Lake as alven ln
mlcroeconomlcs)
Macro vs Mlcro
ln macroeconomlcs we donL care abouL whaL ls produced and who
aeLs Lo consume whaL We do care abouL how much ls produced
lLs all abouL Lhe bla plcLure and noL Lhe small deLall
ln mlcroeconomlcs we focus on lndlvldual declslon maklna
ln macroeconomlcs we focus on Lhe behavlor of Lhe economv as a
whole
49
Macro vs Mlcro
50
Macroeconomics analyzes the size oI the
economy (pie), not caring what's inside or
how its divided.
Microeconomics looks at the ingredients
and who gets to eat it, not caring about the
size and shape.
,|cro fnd ,fcro Lconom|c Vfr|fs
us|nss Lconom|cs
us|nss conom|cs ls LhaL parL of economlc Lheorv
whlch focuses on buslness enLerprlses and lnqulres
lnLo Lhe facLors conLrlbuLlna Lo Lhe dlverslLv of
oraanlzaLlonal sLrucLures and Lo Lhe relaLlonshlps of
flrms wlLh labour caplLal and producL markeLs
aw of uemand
unl1 1
aw of uemand lnLroducLlon
uemand
1he wllllnaness and ablllLv of buvers Lo
purchase a aood or servlce
ueslre or wanL or wlsh of a consumer Lo buv a
commodlLv or servlce
fw o mfnd
rlnclple LhaL buvers wlll purchase (demand)
more of a producL as lLs prlce drops and less
as lLs prlce lncreases
54
uemand
mfnd |nd|cfts how much o f product
consumrs fr oth w||ng fnd f to uy ft
fch poss| pr|c dur|ng f g|vn pr|od
othr th|ngs rmf|n|ng constfnt
55
aw of uemand
@h fw o dmfnd sfys thft qufnt|ty dmfndd
vfr|s |nvrsy w|th pr|c othr th|ngs constfnt
@hus th h|ghr th pr|c th smfr th qufnt|ty
dmfndd
56
aw of uemand
mfnd wfnts fnd nds
5ust|tut|on ct
@h chfng |n th rft|v pr|c (th pr|c o on good rft|v to th pr|cs o
othr goods) cfuss th sust|tut|on ct
I f pr|cs chfngd y sfm mfrg|n thr woud no sust|tut|on ct
Incom ct
,ony |ncom th numr o dofrs you rc|v pr pr|od
f |ncom mfsur |n trms o how mfny goods fnd srv|cs you cfn uy
|m|n|sh|ng mfrg|nf ut||ty
,frg|nf ut||ty fdd|t|onf sft|sfct|on you dr|v rom fch |tm
fw o mfrg|nf ut||ty you dr|v rom fch fdd|t|onf |tm consumd
dcrfss fs your consumpt|on |ncrfss (fmp p|zzf s|cs)
57
uemand Schedule
and uemand Curve
mfnd vrsus qufnt|ty dmfndd
Ind|v|duf dmfnd
,frkt dmfnd
58
uemand Schedule
!rice Quantity Demanded
per !izza per Week (miIIions)
, 15 8
- 12 14
. 9 20
d 6 26
e 3 32
59
8 14 20 26 32
MiIIions of pizzas per week
15
12
9
6
3
0
!
r
i
c
e

p
e
r

p
i
z
z
a
uemand Curve for lzza
,
-
.
d
e
D
60
12
8
4
1
(c) Chris
12
8
4
1 2
(b) Brianna
12
8
4
!
r
i
c
e
1 2 3
!izzas
(per week
(a) Hector
lndlvldual uemand for lzzas
d
H
d
B
d
C
61
12
8
4
!
r
i
c
e
1 2 3
!izzas
(per week
(d) Market demand for pizzas
6
MarkeL uemand for lzzas
d
H
d
B
d
C
D
+ + =
ueLermlnanLs of uemand
;uanLlLv demanded for a commodlLv
Lo purchase bv consumer depends
upon such as
;d lr1?C
Where rlce of Lhe CommodlLv
r rlce of relaLed commodlLv
1 1asLe preference
? lncome of Lhe consumers
C CLher facLors
ueLermlnanLs of uemand
;uanLlLv demanded for a commodlLv
Lo purchase bv consumer depends
upon such as
;d lr1?C
Where rlce of Lhe CommodlLv
r rlce of relaLed commodlLv
1 1asLe preference
? lncome of Lhe consumers
C CLher facLors
ueLermlnanLs of uemand
(l)rlce of CommodlLv()
normal aoods exrlce
Clffen aoods
ueLermlnanLs of uemand
lncrease ln demand

0 2000 4000 6000 8000 10000 12000 14000

Quantity
!
r
i
c
e
d demand New demand Supp
An lncrease ln
demand shlfLs Lhe
demand curve Lo
Lhe rlahL
Lqulllbrlum prlce
lncreases
;uanLlLv
demanded
lncreases
uecrease ln demand

0 2000 4000 6000 8000 10000 12000 14000

Quantity
!
r
i
c
e
d demand New demand Supp
A decrease ln
demand shlfLs
Lhe demand
curve Lo Lhe
lefL
Lqulllbrlum
prlce falls
;uanLlLv
demanded falls
LlasLlclLv
unl1 1
70
CompuLlna Lhe
LlasLlclLv of uemand
Lfst|c|ty o dmfnd mfsurs th prcntfg
chfng |n qufnt|ty dmfndd d|v|dd y
prcntfg chfng |n pr|c
Iasticity
of
demand
=
Percentage change in
quantity demanded
Percentage
change in price
71
CompuLlna
LlasLlclLv of uemand
Lfst|c|ty vfus
1 lL ls fst|c
ercenLaae chanae ln prlce wlll resulL ln laraer percenLaae chanae
ln Lhe quanLlLv demanded
1 lL ls un|tfst|c
1 lL ls |nfst|c
uemand ls usuallv more elasLlc aL hlaher prlces and less
elasLlc wlLh lower prlces
Lfst|c|ty fnd totf rvnu
rlce x's quanLlLv demanded aL LhaL prlce
72
8 14 20 26 32
MiIIions of pizzas per week
15
12
9
6
3
0
P
r
i
c
e

p
e
r

p
i
z
z
a
1he uemand for lzza
D
73
ueLermlnanLs of
uemand LlasLlclLv
vf|f||ty o sust|tuts
1he areaLer Lhe avallablllLv of subsLlLuLes for a aood Lhe areaLer Lhe
aood's elasLlclLv of demand
5hfr o consumr's udgt spnt on th good
lncrease ln prlces reduced Lhe demand because people are noL boLh
wllllna and able Lo purchase hlaher prlces
mfttr o t|m
1he lonaer Lhe ad[usLmenL perlod Lhe areaLer Lhe consumer's ablllLv
Lo subsLlLuLe
5om fst|c|ty st|mfts
1he elasLlclLv of demand ls areaLer ln Lhe lona run because
consumers have more Llme Lo ad[usL
74
50 75 95100
H||||ons of ga||ons per day
0
125
100
P
r
|
c
e

p
e
r

g
a
|
|
o
n
D

D
m
D
w
uemand 8ecomes
More LlasLlc Cver 1lme
75
SelecLed
LlasLlclLles of uemand
Product Product Short Run Short Run Long Run Long Run
Electricity (residential) 01 19
Air travel 01 24
Medical care and hospitalization 03 09
Gasoline 04 15
Movies 09 37
Natural gas (residential) 14 21
76
CLher ueLermlnanLs of uemand
onsumr Incom
@h pr|cs o rftd goods
@h numr fnd compos|t|on o
consumrs
onsumr pctft|ons
onsumr tfsts
77
Chanaes ln Consumer
lncome
I |ncom consumrs w||ng fnd f to
uy mor wh|ch dmfnd
mfnd curv sh|ts to th r|ght
@wo cftgor|s o goods
Normf goods dmfnd increoses fs mony
|ncom |ncrfss
Inr|or goods dmfnd ecreoses fs mony
|ncom |ncrfss
Lfmps usd coth|ng us r|ds tc
78
Chanaes ln Lhe rlces of 8elaLed
Coods
5ust|tuts
crfs |n pr|c o on |tm w| rduc th
dmfnd or f sust|tut
Lxample 1acos and lzza
ompmnts
rtf|n goods usd togthr
Lxample alrllne LlckeLs and car renLals
dcrfs |n th pr|c o on sh|ts th dmfnd
o th othr r|ghtwfrd
79
Chanaes ln rlces of 8elaLed Coods
(conL)
hfngs |n s|z or compos|t|on o th popuft|on
w| |ncrfs dmfnd fnd sh|t th curv to th
r|ght
hfngs |n consumr pctft|ons cfn sh|t th
dmfnd curv to th t or th r|ght
hfngs |n consumr tfsts
@fsts fr your |ks fnd d|s|ks fs f consumr
rlce lncome
and Cross LlasLlclLv
LlasLlclLv Lhe concepL
1he responslveness of one varlable Lo chanaes
ln anoLher
When prlce rlses whaL happens
Lo demand?
uemand falls
8u1!
Pow much does demand fall?
LlasLlclLv Lhe concepL
lf prlce rlses bv 10 whaL happens Lo
demand?
We know demand wlll fall
8v more Lhan 10?
8v less Lhan 10?
Lfst|c|ty mfsurs th tnt to wh|ch
dmfnd w| chfng
LlasLlclLv
4 baslc Lvpes used
9r|c fst|c|ty o dmfnd
9r|c fst|c|ty o suppy
Incom fst|c|ty o dmfnd
ross fst|c|ty
LlasLlclLv
rlce LlasLlclLv of uemand
1he responslveness of demand
Lo chanaes ln prlce
Where chanae ln demand
ls areaLer Lhan chanae ln prlce fst|c
Where chanae ln demand ls less Lhan chanae
ln prlce |nfst|c
LlasLlclLv
The Formula:
Ped =
% Change in Quantity Demanded
___________________________
% Change in Price
If answer is between 0 and -1: the relationship is inelastic
If the answer is between -1 and infinity: the relationship is elastic
Note: PED has - sign in front of it; because as price rises
demand falls and vice-versa (inverse relationship between
price and demand)
LlasLlclLv
Price ()
Quantity Demanded
The demand curve can be a
range of shapes each of which
is associated with a different
relationship between price and
the quantity demanded.
LlasLlclLv
Price
Quantity Demanded (000s)
D
The importance of elasticity
is the information it
provides on the effect on
total revenue of changes in
price.
5
100
Total revenue is price x
quantity sold. In this
example, TR = 5 x 100,000
= 500,000.
This value is represented by
the grey shaded rectangle.
Total Revenue
Elasticity
Price
Quantity Demanded (000s)
D
If the firm decides to
decrease price to (say) 3,
the degree of price
elasticity of the demand
curve would determine the
extent of the increase in
demand and the change
therefore in total revenue. 5
100
3
140
Total Revenue
LlasLlclLv
Price ()
Quantity Demanded
10
D
5
5
6
% A Price = -50%
% A Quantity Demanded = +20%
Ped = -0.4 (Inelastic)
Total Revenue would fall
Producer decides to lower price to attract sales
Not a good move!
LlasLlclLv
Price ()
Quantity Demanded
D
10
5
20
Producer decides to reduce price to increase sales
7
% A in Price = - 30%
% A in Demand = + 300%
Ped = - 10 (Elastic)
Total Revenue rises
Good Move!
LlasLlclLv
I dmfnd |s pr|c
fst|c
lncreaslna prlce would
rduc 18 (A ;d A
)
8educlna prlce would
|ncrfs 18
(A ;d A )
I dmfnd |s pr|c
|nfst|c
lncreaslna prlce would
|ncrfs 18
(A ;d A )
8educlna prlce would
rduc 18 (A ;d A
)
LlasLlclLv
Incom Lfst|c|ty o mfnd
1he responslveness of demand
Lo chanaes ln lncomes
Normf Good demand rlses
as lncome rlses and vlce versa
Inr|or Good demand falls
as lncome rlses and vlce versa
LlasLlclLv
Incom Lfst|c|ty o mfnd
A poslLlve slan denoLes a normal aood
A neaaLlve slan denoLes an lnferlor aood
LlasLlclLv
lor example
?ed 06 Cood ls an |nr|or good buL |nfst|c a rlse ln lncome of 3
would lead Lo demand falllna
bv 18
?ed + 04 Cood ls a normf good buL |nfst|c
a rlse ln lncomes of 3 would lead Lo demand rlslna
bv 12
?ed + 16 Cood ls a normf good and fst|c
a rlse ln lncomes of 3 would lead Lo demand rlslna
bv 48
?ed 21 Cood ls an |nr|or good and fst|c
a rlse ln lncomes of 3 would lead Lo a fall ln demand of 63
LlasLlclLv
ross Lfst|c|ty
1he responslveness of demand
of one aood Lo chanaes ln Lhe prlce of a
relaLed aood elLher
a subsLlLuLe or a complemenL
ed =
% A Qd of good t
__________________
% A Price of good y
LlasLlclLv
Goods wh|ch fr compmnts
Cross LlasLlclLv wlll have neaaLlve slan (lnverse
relaLlonshlp beLween Lhe Lwo)
Goods wh|ch fr sust|tuts
Cross LlasLlclLv wlll have a poslLlve slan (poslLlve
relaLlonshlp beLween Lhe Lwo)
LlasLlclLv
9r|c Lfst|c|ty o 5uppy
1he responslveness of supplv Lo chanaes
ln prlce
lf es ls |nfst|c lL wlll be dlfflculL for suppllers Lo
reacL swlfLlv Lo chanaes ln prlce
lf es ls fst|c supplv can reacL qulcklv Lo chanaes ln
prlce
Pes =
% A Quantity Supplied
____________________
% A Price
ueLermlnanLs of LlasLlclLv
@|m pr|od Lhe lonaer Lhe Llme under conslderaLlon Lhe
more elasLlc a aood ls llkelv Lo be
Numr fnd cosnss o sust|tuts
Lhe areaLer Lhe number of subsLlLuLes
Lhe more elasLlc
@h proport|on o |ncom tfkn up y th product Lhe
smaller Lhe proporLlon Lhe more lnelasLlc
uury or Ncss|ty for example
addlcLlve druas
lmporLance of LlasLlclLv
8elaLlonshlp beLween chanaes
ln prlce and LoLal revenue
lmporLance ln deLermlnlna
whaL aoods Lo Lax (Lax revenue)
lmporLance ln analvslna Llme laas ln
producLlon
lnfluences Lhe behavlour of a flrm
100
MovemenL alona
Lhe Curve
,ovmnt vs 5h|t
chfng |n pr|c cfuss f movmnt fong th
dmfnd curv chfngs th qufnt|ty dmfndd
chfng |n on o th dtrm|nfnts o dmfnd
othr thfn pr|c cfuss f sh|t o f dmfnd curv
101
LxLenslons of uemand Analvsls
o o t|m
our w||ngnss to pfy mor or t|msfv|ng
goods dpnds on th opportun|ty cost o your
t|m"
uemand lorecasLlna
unl1 1
ulmlnlshlna Maralnal uLlllLv
unl1 1
Consumer Surplus
unl1 1
8reak LvenolnL
unl1 1
erfecL and lmperfecL
CompeLlLlon
unl1 1
MarkeL Lqulllbrlum
unl1 1
8ole of Lconomlc lannlna
unl1 1
lndlan Lconomlc lannlna
unl1 1
8uslness Lconomlcs
unl1 1
8uslness Lconomlcs
unl1 1
8uslness Lconomlcs
unl1 1
8uslness Lconomlcs
unl1 1
8uslness Lconomlcs
unl1 1
8uslness Lconomlcs
unl1 1