lecture3 - elasticities - handout

lecture3 - elasticities - handout - 1/13/2009 Topic 2:...

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1/13/2009 1 Topic 2: Supply and Demand (2) USC Marshal Supply and demand • Continue the review of the basic supply and demand framework – Market equilibrium – Demand elasticities • Own-price USC Marshal • Cross-price • Income – Elasticity of supply 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 Marshal • For our example: P x 32 2 Q x d and P x 5 Q x s 32 2 Q x d 5 Q x s Q x 9 P x 14
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1/13/2009 2 Market equilibrium P x 30 35 40 USC Marshal Q x 0 5 10 15 20 25 51 0 15 20 Q x * =9 P x * = 14 Market equilibrium • Recall that the demand and supply functions were given by: •S uppose that P y remains at $4 but I increases to Q x d 15 1 2 P x 1 10 I 1 4 P y P x 5 Q x s USC Marshal $80. What is the new market equilibrium? • Suppose that P y = $4 and I = $80 but there is an increase in the costs of production so that the supply curve becomes . What is the new market equilibrium? P x 11 Q x s 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 i i ff t d l ti t th ilib i tit USC Marshal price is affected relative to the equilibrium quantity
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1/13/2009 3 Market equilibrium P x 25 30 35 40 S S D1 D2 USC Marshal Q x 0 5 10 15 20 51 0 15 20 S' P* Q* Q1* Q2* P1* P2* 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 X USC Marshal : percentage change in output per percentage change in the other variable – The second option is used in economics and called an elasticity % Δ Q % Δ X Elasticities Why use elasticities?
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lecture3 - elasticities - handout - 1/13/2009 Topic 2:...

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