Lecture3 - ECO100 - ECO 100Y ECO 100Y tr d ti n t tr d ti n...

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Unformatted text preview: ECO 100Y ECO 100Y tr d ti n t tr d ti n t Introduction to Introduction to conomics conomics Economics Economics Lecture 3: Lecture 3: Elasticity Elasticity Gustavo Indart Slide 1 An Increase in the Price of Oil 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 Therefore, the supply of oil must be reduced But suppose that they want to raise the price of oil from $80 to $120 a barrel How much should the supply curve shift to the left achieve this result? to achieve this result? In order to answer this question we must know how e quantity demanded responds to a change in price Gustavo Indart Slide 2 the quantity demanded responds to a change in price he Shape of the Demand Curve he Shape of the Demand Curve The Shape of the Demand Curve The Shape of the Demand Curve The size of the required shift in the supply curve depends on the shape of the demand curve That is, it depends on the slope of the demand curve Consider two possible demand curves, one relatively flat ( D ) and the other relatively steep ( D ) 1 2 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 he Slope of the Demand Curve he Slope of the Demand Curve The Slope of the Demand Curve The Slope of the Demand Curve As price increases from $80 to $120, the antity demanded decreases from Q P quantity demanded decreases from Q 1 to Q 2 along the flatter demand curve D 1 . As price increases from $80 $120 th tit S S to $120, the quantity demanded decreases from Q 1 to Q 3 along the steeper emand curve D S $80 $120 demand curve D 2 . The flatter demand curve shows a greater Q D 1 D 2 Q 1 Q 2 Q responsiveness of the quantity demanded to a change in price. Gustavo Indart Slide 4 3 rice Elasticity of Demand rice Elasticity of Demand Price Elasticity of Demand Price Elasticity of Demand The flatter demand curve, the greater the 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 demand for a commodity Therefore, we need to know the price elasticity of emand 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 easuring Price Elasticity easuring Price Elasticity Measuring Price Elasticity Measuring Price Elasticity The price elasticity of demand measures p y responsiveness as the percentage change in the quantity demanded that results from a percentage change in ri price ercentage change in quantity demanded Q D Percentage change in quantity demanded % Q = = Percentage change in price % P This measure is usually called the price elasticity of demand or demand elasticity Gustavo Indart Slide 6 y Example: The Demand for Oil...
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Lecture3 - ECO100 - ECO 100Y ECO 100Y tr d ti n t tr d ti n...

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