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Lecture3 - ECO100 - Intr Introduction to Economics...

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ECO 100Y Intr d ti n t Introduction to Economics Lecture 3: Elasticity © Gustavo Indart Slide 1
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An Increase in the Price of Oil Suppose that the OPEC wants to raise the price of oil – what should it do to achieve this goal? The Law of Supply says that a decrease in the supply of a commodity will increase its price ¾ Therefore, the supply of oil must be reduced But suppose that they want to raise the price of oil f $80 $120 b l from $80 to $120 a barrel ¾ How much should the supply curve shift to the left to achieve this result? to achieve this result? In order to answer this question we must know how the quantity demanded responds to a change in price © Gustavo Indart Slide 2
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The Shape of the Demand Curve The size of the required shift in the supply curve depends on the shape of the demand curve ¾ That is, it depends on the slope of the demand curve Consider two possible demand curves, one relatively flat ( D 1 ) and the other relatively steep ( D 2 ) ¾ In which case will a greater shift in the supply curve be required to increase the price of oil from $80 to $120 a barrel? © Gustavo Indart Slide 3
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The Slope of the Demand Curve As price increases from $80 to $120, the quantity demanded decreases from Q 1 to P to Q 2 along the flatter demand curve D 1 . As price increases from $80 t $120 th tit S S’ S’’ to $120, the quantity demanded decreases from Q 1 to Q 3 along the steeper demand curve D 2 D 1 $80 $120 . The flatter demand curve shows a greater Q D 2 Q 1 Q 2 Q 3 responsiveness of the quantity demanded to a change in price. © Gustavo Indart Slide 4
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Price Elasticity of Demand The flatter demand curve, the greater the i f h i d d d h responsiveness of the quantity demanded to a change in its price The responsiveness of the quantity demanded to a change in price is called the price elasticity of d d f di demand for a commodity ¾ Therefore, we need to know the price elasticity of demand in order to determine the size of the demand in order to determine the size of the required shift in the supply curve © Gustavo Indart Slide 5
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Measuring Price Elasticity The price elasticity of demand measures responsiveness as the percentage change in the quantity demanded that results from a percentage change in pri price Percentage change in quantity demanded % Q D % η = = Percentage change in price % P This measure is usually called the price elasticity of demand or demand elasticity © Gustavo Indart Slide 6
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Example: The Demand for Oil Suppose that at $80 a barrel, 110 million barrels of oil a day are sold As the price increases to $120 a barrel, the quantity demanded decreases to 90 million barrels a day So we have two points on the demand curve for oil: ¾ A = (110 80) and B = (90 120) A = (110, 80) and B = (90, 120) When price increases by $40 a barrel, the quantity demanded decreases by 20 million barrels a day To calculate the elasticity of demand, we have to express changes in price and quantity demanded as percentage © Gustavo Indart Slide 7 changes
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Changes in Price and Quantity D d d f Oil Demanded of Oil P B
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