Lecture 03 - ECO100 - Intr Introduction to Economics...

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ECO 100Y tr d ti n t Introduction to conomics 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 from $80 to $120 a barrel ¾ 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
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he 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 ¾ That is, it depends on the slope of the demand curve ± Consider two possible demand curves, one relatively at ( and the other relatively steep ( flat ( D 1 ) and the other relatively steep ( D 2 ) ¾ In which case will a greater shift in the supply curve e required to increase the price of oil from $80 to 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 If we consider the flatter demand curve D 1 , as price Note that there is only one demand curve at any P increases from $80 to $120 the quantity demanded decreases from Q 1 to Q 2 . time either D 1 or D 2 but not both. S’ S’’ If we consider the steeper demand curve D 2 , as price increases from $80 to $120 S $80 $120 the quantity demanded decreases from Q 1 to Q 3 . Q D 1 D 2 Q 1 Q 2 Q The flatter demand curve shows a greater responsiveness of the antity demanded to a © Gustavo Indart Slide 4 3 quantity demanded to a change in price.
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rice 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 ¾ Therefore, we need to know the price elasticity of demand in order to determine the size of the required shift in the supply curve © Gustavo Indart Slide 5
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easuring Price Elasticity Measuring Price Elasticity ± The price elasticity of demand measures py 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 % ± η = = Percentage change in price % P ± This measure is usually called the price elasticity of demand or demand elasticity © Gustavo Indart Slide 6 y
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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) ±
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Lecture 03 - ECO100 - Intr Introduction to Economics...

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