Week 3_mastering demand

# Week 3_mastering demand - Department of Food and Resource...

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LESE204 Department of Food and Resource Economics Mastering Demand

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LESE204 Department of Food and Resource Economics 1. Elasticity Definition %change in dependent variable with respect to % change in independent variable If E A,B > 0, then A and B are positively correlated. If E A,B < 0, then A and B are negatively correlated. B A E B A % % , If E A,B = 0, then A and B are unrelated. A B dB dA B dB A dA E B A / ,
LESE204 Department of Food and Resource Economics 1. Elasticity Some example Own price elasticity = Income elasticity = Q P dP dQ Cross price elasticity = , Q P dP dQ C C Demand function Q = Q(P; Pc, Ps, I) Q P dP dQ S S Q I dI dQ

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LESE204 Department of Food and Resource Economics 1. Elasticity Some example Own price elasticity Factors that affect own price elasticity i) number of substitutes: more substitute? more elastic ii) time: short run – inelastic , long run - elastic If consumers are allowed enough time, they can find other substitutes. iii) Expenditure share: If the share of a certain commodity is small within total expenditure, then consumers tend to respond slowly to the change in the price of that commodity Demand function Q = Q(P; Pc, Ps, I)
LESE204 Department of Food and Resource Economics 1. Elasticity Some example Own price elasticity = Income price elasticity = Q P b Cross price elasticity = , Q P c C Demand function linear demand Q = a + bP + cP C + eP S +gI Q P e S Q I g

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LESE204 Department of Food and Resource Economics 1. Elasticity Some example Own price elasticity = Income price elasticity = b Cross price elasticity = , c Demand function log-log demand : elasticities are constant lnQ = a + blnP + clnP C + elnP S +glnI e g Q P dP dQ P dP dQ Q P d dP dP dQ dQ Q d P d Q d 1 1 ln ln ln ln
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Week 3_mastering demand - Department of Food and Resource...

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