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Microeconomics - equilibrium Friday 2:01 PM The Equilibrium...

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9/14/07 equilibrium Friday, September 21, 2007 2:01 PM The Equilibrium Continued 9/14/07 “The only price that can maintain itself in a free market is the equilibrium price.” Impact of changes or shifts in demand and supply on the equilibrium. 1. suppose that there is an increase in consumers income and that commodity is normal, what happens to the equilibrium price and quantity. 1. suppose that there is an improvement in technology for producing a commodity, what happens to the equilibrium price and quantity? Ask yourself the following questions. a. does income effect demand or supply? Answer is demand a. does demand shift to the left or the right? Answer is increase. Ask yourself the following questions a. does technology affect demand or supply? The answer is supply. a. Will the supply curve shift to the right (increase) or shift to the left(decrease)? The answer is right(increase). Simultaneous change in demand and supply. Suppose that there is an increase in incomes of consumers and the commodity is normal. Suppose further that at the same time there is an improvement in technology for producing that commodity. What will be the impact on the equilibrium price and quantity? Quantity will increase, price will increase. Quantity will increase, price will decrease. Pasted from < file:///C:\Users\Owner\Documents\The%20Equilibrium%20Continued%209.14.07.doc 9/17/07 elasticity and its apps Friday, September 21, 2007 2:02 PM Microeconomics 9/17/07 Elasticity and its applications Consider the following two figures: figure A and figure B. on sep paper. In both of these figures the law of demand is observed. Also in both figure a and b there is an equal change in price for p1 to p2.
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However in figure A, quantity responds to the decrease in price by increasing so much from Q1 to Q2. On the other hand in figure B quantity responds only a little by increasing from Q1 to Q2 to the same decrease in price. These two figures illustrate the question of price elasticity of demand. Price elasticity of demand refers to the degree to which quantity demanded responds to a change in price. Measurement of price elasticity of demand Price elasticity of demand is measured by the following formula: Price elasticity of demand= proportionate change in quantity demanded/ divided by proportionate change in price Suppose that student M used to buy 12 slices of pizza a week when the price was 2 dollars a slice. How ever, student M started buying 8 slices of pizza a week when the price increased from 2 dollars to 3 dollars a slice. Calculate student M’s price elasticity of demand. On sep piece of paper. Types of price elasticity of demand 1. elastic demand. Demand is elastic if proportionate change in quantity demanded is greater than proportionate change in price. Price elasticity coefficient for elastic demand is greater than 1. graph on separate piece of paper.
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