PAM_2000_Spring_2009_Lecture_5

PAM_2000_Spring_2009_Lecture_5 - PAM 2000 Lecture 5 Agenda...

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    PAM 2000 Lecture 5 Agenda: Price Elasticity of demand Income elasticity of demand Cross price elasticity of demand Price elasticity of supply Consumer choice: Indifference curves
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    Elasticity of Demand (con’t) Some terms: If ε > 1, then demand is Elastic If ε < 1, then demand is Inelastic If ε = 1, the demand is Unit Elastic
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    Extreme shapes of demand curve If ε = 0, then its “perfectly inelastic demand.” This is a vertical demand curve Examples? If ε = ∞ its “perfectly elastic demand.” This is a horizontal demand curve Examples?
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    Vertical and Horizontal Demand Curves p , Price per unit (a) Perfectly Elastic Demand Q , Units per time period p *
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    Vertical and Horizontal Demand Curves (b) Perfectly Inelastic Demand p , Price per unit Q * Q , Units per time period
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    Extreme shapes of demand curve  (con’t) Most demand curves are somewhere in between Price elasticity changes as we move down a straight-line demand curve At top-most point, curve is infinitely or perfectly elastic. At bottom-most point, it is perfectly inelastic. So elasticity varies from infinity to zero in between
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    Elasticity Along the Pork Demand Curve p , $ per kg a /2 = 143 a /5 = 57.2 D a = 286 220 Q , Million kg of pork per year 0 11.44 a / b = 14.30 3.30 a /(2 b ) = 7.15 Elastic: ε < –1 ε = –4 Unitary: ε = –1 ε = – 0.3 Inelastic: 0 > ε > –1 Perfectly inelastic Perfectly elastic
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    Things that influence elasticity of  demand Examples: Number of substitute goods Length of time under consideration EX: Say OPEC oil increases result in doubling of price of gasoline Adjustment over day? Month? Year?
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    Income Elasticity of Demand This (ks-eye) tells how sensitive quantity
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