Chapter 3: Applying the SupplyandDemand Model
•
5 Main Topics:
1.
How shapes of demand and supply curves matter
: The effect of a shock
(such as a new tax or an increase in the price of an input) on market
equilibrium depends on the shape of demand ad supply curves
2.
Sensitivity of quantity demanded to price:
The sensitivity of the
quantity demanded to price is summarized by a single measure called the
price elasticity of demand
3.
Sensitivity of quantity supplied to price:
The sensitivity of the quantity
supplied to price is summarized by a single measure called the price
elasticity of supply
4.
Long run versus short run
: The sensitivity of the quantity demanded or
supplied to price varies with time
5.
Effects of a sales tax
:
How a sales tax increase affects the equilibrium
price and quantity of a good and whether the tax falls more heavily on
consumers or suppliers depends on the shape of the supply and demand
curves
3.1
How Shapes of Demand and Supply Curves Matter
•
The shapes of the demand and supply curves determine by how much a shock
affects the equilibrium price and quantity
3.2
Sensitivity of Quantity Demanded to Price
•
Elasticity:
the percentage change in a variable in response to a given percentage
change in another variable
•
Price elasticity of demand:
the percentage change in the
quantity demanded
in
response to a given percentage change in the price
∈
=
percentage change in quantity demanded
=
∆
Q/Q
percentage change in price
∆
p/p
•
The negative sign on the elasticity of demand illustrates the Law of Demand: less
quantity is demanded as the price rises
•
The elasticity of demand is different at every point along a downward sloping
linear demand curve; however the elasticities are constant along a horizontal and
vertical linear demand curve
•
At a point where the elasticity of demand is zero, the demand curve is said to be
perfectly inelastic
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Between 0 and –1 the elasticity is considered to be
inelastic
: changing the price
has relatively little effect on quantity
•
If the elasticity is less than negative one, the demand curve is called elastic.
•
When the demand curve hits the price axis it is
perfectly elastic
•
Along the
constantelasticity demand curve
the elasticity is the same at every
point along the curve
•
The horizontal demand curve shows that people are willing to buy as much as
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 Spring '08
 UNUR
 Supply And Demand, percentage change

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