lecture3 - elasticities

Lecture3- - Topic 2 Supply and Demand(2 USC Marshall Supply and demand Continue the review of the basic supply and demand framework Market

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opic 2: Supply and Demand (2) Topic 2: Supply and Demand (2) USC Marshall
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Supply and demand • Continue the review of the basic supply and demand framework – Market equilibrium – Demand elasticities • Own-price • Cross-price • Income – Elasticity of supply USC Marshall
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Market equilibrium • Given the demand and supply functions, the market equilibrium is established at the price p* that equates the quantity demanded with the quantity supplied: Q x s p x ,... Q x d p x USC Marshall
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Market equilibrium • Given the demand and supply functions, the market equilibrium is established at the price p* that equates the quantity demanded with the quantity supplied: • For our example: Q x s p x ,... Q x d p x P x 32 2 Q x d and P x 5 Q x s 32 2 Q d 5 Q s x x Q x 9 P x 14 USC Marshall
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Market equilibrium P x 5 40 25 30 35 15 20 P x * = 14 5 10 USC Marshall Q x 0 51 0 15 20 Q x * =9
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Market equilibrium • Recall that the demand and supply functions were given by: Q x d 15 1 2 P x 1 10 I 1 4 P y P x 5 Q x s • Suppose that P y remains at $4 but I increases to $80. What is the new market equilibrium? •S u ppose that P = $4 and I = $80 but there is an y increase in the costs of production so that the supply curve becomes . What is the P x 11 Q x s USC Marshall new market equilibrium?
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Market equilibrium • How much prices and quantities change in equilibrium depends on both the magnitude of change in demand/supply and the steepness of the other curve – The steeper the curve, the more the equilibrium price is affected relative to the equilibrium quantity USC Marshall
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Market equilibrium P x 40 30 35 D2 20 25 S S' D1 10 15 P* 1* 0 5 P1* P2* USC Marshall Q x 51 0 15 20 Q* Q1* Q2*
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Elasticities • How to measure the responsiveness of the quantity demanded (supplied) to changes in prices and other variables? USC Marshall
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Elasticities • How to measure the responsiveness of the quantity demanded (supplied) to changes in prices and other variables? • Two alternatives: : change in output per change in the other variable Δ Q Δ : percentage change in output per percentage change in the other variable % Δ Q % Δ X USC Marshall
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Elasticities • How to measure the responsiveness of the quantity demanded (supplied) to changes in prices and other variables? • Two alternatives: : change in output per change in the other variable Δ Q Δ : percentage change in output per percentage change in the other variable % Δ Q % Δ X – The second option is used in economics and called an elasticity USC Marshall y
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Elasticities Why use elasticities? – A simple summary measure describing the responsiveness of demand • Makes it possible to compare the demand for gasoline in the US per year with the demand for restaurant meals in downtown LA per week USC Marshall
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Elasticities Why use elasticities?
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This note was uploaded on 03/09/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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Lecture3- - Topic 2 Supply and Demand(2 USC Marshall Supply and demand Continue the review of the basic supply and demand framework Market

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