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MGEA02H3 Lecture Notes - Lecture 8: Product Rule, Perfect Competition, Economic Surplus

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sangriahornet734
24 Feb 2015
School
UTSC
Department
Economics for Management Studies
Course
MGEA02H3
Professor
Gordon Cleveland

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MGEA02H3 Full Course Notes
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Document Summary

A key characteristic of demand and supply curves! Changes in one variable as another variable changes. Answer is given by the elasticity of supply of tomatoes in. Ed = percentage change in quantity demanded percentage change in price or ed = % qd. how consumers respond to a change in market price. Es = percentage change in quantity supplied percentage change in price or es = % qs. How producers respond to a change in market price. It means that if q = 40 and the price changes by 2%, we expect quantity supplied will change by about 3% It means that if quantity demanded is 80 units and the price changes by 4%, we expect that the quantity demanded will change by about 1%. (why about ?) Demand is unit(ary) elastic if ed = 1. Supply is unit(ary) elastic if es = 1. Thinking about different goods, some have more elastic demands; others have less elastic demands.

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Related Questions

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumers’ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

From the scenario for Katrina’s Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ΔTR = %ΔQ + %ΔP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Δ in TR if ED is -.85 and the %ΔP is 10%?

At the current market equilibrium, the price of a good equals $40, and the quantity equals 10 units. At this equilibrium, the price elasticity of supply is 2.0. Assume that the supply curve is linear.

a. Use the price elasticity and market equilibrium to find the supply curve (Hint: the supply curve has the following form: q = a + (dq/dp)p. First, find the value of dq/dp; then, find the value of a.

b. Calculate the producer surplus in the market.

c. Imagine that a policy results in the price falling from $40 to $30. By how much does producer surplus fall?

d. What fraction of the lost producer surplus is due to the reduction in the quantity supplied, and what fraction is due to the fall in price received per unit sold?