ECON 1B03 Lecture Notes - Lecture 4: Demand Curve, Substitute Good

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21 May 2018

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Notes About Demand Elasticity

- The larger the price elasticity coefficient, the more elastic the demand for the good

- The more price elastic demand is, the flatter will be the demand curve

- We do’t use poit elasticity for icoe elasticity or cross-price elasticity

Elasticity of Supply

- Price elasticity of supply, Es, is a measure of how much the quantity supplied of a good

responds to a change in the price of the good

- Price elasticity of supply is the percentage change in quantity supplied resulting from a

percentage change in price

- Since P and Qs always move in the same direction, Es will always be >0 e. if P ↑, Qs ↑

- The percentage change formula is:

- Where Q= quantity supplied

- The point elasticity formula is: Es = dQ/dP(slope) * P/Q (p and q coordinate)

Categories of Supply Elasticities:

Perfectly Inelastic Supply

- Es = 0

- Qs will not change for any change in P

- Supply curve is vertical

- Example: rare art (Mona lisa)

Inelastic Supply:

- Es between 0 and 1 (a fraction)

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The larger the price elasticity coefficient, the more elastic the demand for the good. The more price elastic demand is, the flatter will be the demand curve. We do(cid:374)"t use poi(cid:374)t elasticity for i(cid:374)co(cid:373)e elasticity or cross-price elasticity. Price elasticity of supply, es, is a measure of how much the quantity supplied of a good responds to a change in the price of the good. Price elasticity of supply is the percentage change in quantity supplied resulting from a percentage change in price. Since p and qs always move in the same direction, es will always be >0 (cid:894)e(cid:454). if p , qs (cid:895) The point elasticity formula is: es = dq/dp(slope) * p/q (p and q coordinate) Qs will not change for any change in p. Supply does not respond greatly to a change in price. Any price change will affect qs infinitely.

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A Steel Supply and Demand for the USA are given by Demand: P = 1200 - 100 (QD) and supply: P = 100 (QS) where QD = quantity demanded and QS = quantity supplied

Compute the price elasticity of demand when the price is $800.

What can you say about the demand?

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Chuck, Michael and Hakeem are three retired basketball players. They determine that in Madison there is demand for private basketball coaching. The demand and supply curves for private basketball coaching are Qd = 50 - 0.5 P and QS = P-10 respectively.

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1. If a 3 percent increase in price leads to a 5 percent increase in quantity supplied, then

a. Supply is unit elastic

b. Demand is inelastic.

c. Demand is elastic.

d. Supply is elastic.

e. Supply is inelastic.

2. Moving along a demand curve, the quantity demanded decreases 8 percent when price increases 10 percent.

The price elasticity of demand is calculated to be ________.

Given the price elasticity of demand calculated in part a, demand is ________ (elastic, inelastic or unitary elastic) along this portion of the demand curve.

3. Fill in the blanks:

When demand is elastic, the _______ effect dominates the _______ effect.

When demand is inelastic, the _______ effect dominates the _______ effect.

4. Use the following coordinates to answer the following questions.

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ECON 1B03 Lecture Notes - Lecture 4: Demand Curve, Substitute Good

ECON 1B03 Full Course Notes

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