Escolar Documentos
Profissional Documentos
Cultura Documentos
Q
P P Q
Q P
ED
P Q
A numerical example
Quantity
Q2-Q1
Price
P2-P1
ED
125
100
-25
(1/-25)X(125/1) = - 0.04x125 = - 5
50
-50
(2/-50)x(100/2) = - 0.04x50 = - 2
10
-40
P
Q
TR
TR
P
a/b
a/2b
0
M
a/2
At P= a/b, Ed = ; at P = 0, Ed = 0; at P= a/2b, Ed = 1
In the region of the demand curve to the left of the mid-point M, demand is
elastic, that is Ed < 1
Ed = (Q/ P)(P/Q) = b
Ed
P Q
Given a demand function:
Qb = 100 30 Pb 20 Pc + .005I, where, Qb = Quantity demanded of beer in
billion 6-packs, Pb = Price of beer per 6-pack ($5), Pc = Price of a pack of chips
($1), and I = Annual household income ($25,000).
Qb = 100 30*(5) 20*(1) + .005*(25000) = 55
Taking partial derivative of the demand function with respect to price and
substituting values for P and Q we get:
Ed
Q P
5
(30)
2.7272
P Q
55
Product
Turkey
Margarine
- 0.84
Beef
- 0.64
Cheese
- 0.46
Potatoes
- 0.30
Bread
- 0.15
EdYX
Qy Px
Qy Px
Qy
Px
Px Qy
Price of X
60
$10
40
$12
EDYX___________
(-20/2)x(10/60) = - 1.66
Edyx
Px
Qy
Edbc
Qb Pc
1
( 20)
0.3636
Pc Qb
55
Classification of
Cross-price elasticity of Demand
Interpretation:
If E
dyx = - 0.36: A one percent increase in price of chips results in
a 0.36% decrease in quantity demanded of beer
Classification:
If (E
dyx > 0): implies that as the price of good X increases, the
quantity demanded of Good Y also increases. Thus, Y and X are
substitutes in consumption (ex. chicken and pork).
If (Edyx < 0): implies that as the price of good X increases, the
quantity demanded of Good Y decreases. Thus Y & X are
Complements in consumption (ex. bear and chips).
Units of Y demanded
EI
Qy I
Qy
I
Qy
I
I
Qy
Income
100
$1200
150
$1600
EI
(50/400)x(1200/100) = 1.5
EI
Qy
EI
Qb
I
25000
(0.005)
2.2727
I
Qb
55
Interpretation:
If E = 2.27: A one percent increase income results in a
I
2.27% increase in quantity demanded of beer
Classification:
If E > 0, then the good is considered a normal good
I
(ex. beef).
If E < 0, then the good is considered an inferior good
I
(ex. ramen noodles)
High income elasticity of demand for luxury goods
Low income elasticity of demand for necessary goods
Income Elasticity of
Demand
Total food
0.31
0.53
Fresh fruits
0.25
Fish
0.20
Beef
0.10
Pork
0.04
Example..
Since E= Q/Q / P/P = -0.8, and
P/P=-0.10
Q/Q= -0.8 *- 0.10
Q=-0.8*-0.10 * 1000 = 80 more margarine containers to be
sold
What would be the total revenue gain?
Revenue without price reduction= 1000*1.50 = 1500
New revenue= 1080 *1.35 = 1458
Was it a good decision?
Ed = (Q/Q ) /(P/P )
Demand Equation
Q = (price, income, tastes and preferences, expectations,
d
and prices of other goods)
Demand changes (shifts) if any right hand side factor other
than price of the commodity changes
Supply Equation
Q = (price, input prices, prices of other goods,
s
expectations, technological change, number of producers)
Supply changes (shifts) if any right hand side factor other
than price of the commodity changes
%Qs = Es(%P) + Ss
Suppose that the current price for pork is $100/cwt and the
quantity bought and sold is 1,000 cwt per day.
What would be the new equilibrium price and quantity?