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Lecture 03

# Lecture 03 - Introduction to Introduction Economics...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 3: Lecture 3: Elasticity Elasticity

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© Gustavo Indart Slide 2 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 ¾ Therefore, the supply of oil must be reduced ± But suppose that they want to raise the price of oil from \$20 to \$25 a barrel ¾ How much should the supply curve shift to the left 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 3 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 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 \$20 to \$25 a barrel?

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© Gustavo Indart Slide 4 The Slope of the Demand Curve The Slope of the Demand Curve D 1 S’ As price increases from \$20 to \$25, the quantity demanded decreases from Q 1 to Q 2 along the flatter demand curve D 1 . P As price increases from \$20 to \$25, the quantity demanded decreases from Q 1 to Q 3 along the steeper demand curve D 2 . S’’ S \$25 The flatter demand curve shows a greater responsiveness of the quantity demanded to a change in price. \$20 D 2 Q 2 Q 3 Q Q 1
© Gustavo Indart Slide 5 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 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

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© Gustavo Indart Slide 6 Measuring Price Elasticity 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 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 7 Example: The Demand for Oil Example: The Demand for Oil ± Suppose that at \$9.50 a barrel, 41 million barrels of oil a day are sold ± As the price increases to \$10.50 a barrel, the quantity demanded decreases to 39 million barrels a day ± So we have two points on the demand curve for oil: ¾ A = (41, 9.5) and B = (39, 10.5) ± When price increases by \$1.00 a barrel, the quantity demanded decreases by 2 million barrels a day ± To calculate the elasticity of demand, we have to express changes in price and quantity demanded as percentage changes

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Lecture 03 - Introduction to Introduction Economics...

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