Chapter 3 Outline - Chapter 3: Applying the...

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Chapter 3: Applying the Supply-and-Demand 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 down-ward 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 constant-elasticity 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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Chapter 3 Outline - Chapter 3: Applying the...

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