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ECON 1. Week 06.2A March 19, 2011. Review. Markets are the interaction of buyers and sellers. Focus on buyers and sellers separately. Ceteris paribus : look at one thing at a time; All other things held equal. Demand for X. $ P x. $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1.

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econ 1

ECON 1

Week 06.2A

March 19, 2011

review
Review
  • Markets are the interaction of buyers and sellers.
  • Focus on buyers and sellers separately.
  • Ceteris paribus: look at one thing at a time; All other things held equal.
demand for x
Demand for X

$ P x

$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1

Dx

Demand shows the amounts purchased at alternative prices(horizontal distances at each price)

Demand x

Dx

Qtyx /T

1 2 3 4 5 6 7 8 9 10

supply curve
Supply Curve

$Price

$10

8

6

4

2

2 4 6 8 10 12 14 16 Qty x/ T

slide5

$Price

$ 4

3

2.50

2.00

1.50

1.00

.50

.25

Demand

Surplus at this $ Price

Supply

100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T

slide6

$Price

$ 4

3

2.50

2.00

1.50

1.00

.50

.25

Demand

Supply

Shortage at this $ Price

100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T

slide7

Market Equilibrium

$Price

4

3

2.50

2.00

1.50

Pe 1.00

.50

.25

Demand

Supply

Qty D = Qty S

100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T

Qe

total revenue p x q
Total Revenue = P X Q

$ P x

Demand

$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1

Supply

Pe

$6x5 = $30

Dx

Qtyx /T

1 2 3 4 5 6 7 8 9 10 11 12

Qe

transaction costs of exchange
Transaction Costs of Exchange
  • Information Costs
    • Search Costs
    • Quality Identification Cost
  • Negotiating Costs: Cost of agreeing on what and how much will be exchanged
  • Transportation Costs: Cost of moving goods between parties
increase in demand
Increase in Demand

$ P x

Dx’

Do

$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1

Sx

E’

Increases price & quantity

E0

Sx

Dx’

Do

Qtyx /T

1 2 3 4 5 6 7 8 9 10 11 12

elasticity a measure of responsiveness of quantity to a change in price
Elasticity: a Measure of responsiveness of Quantity to a Change in Price
  • Ed = % Δ Qd/ % Δ price
  • Es = %  Qs / %  price
elasticity total revenue
Elasticity & Total Revenue

Elastic

Inelastic

$Px

$Px

Qty / T

Qty/T

measures of elasticity
Measures of Elasticity
  • Demand is Elastic : %Δ Qd > %Δ P;

ie |Ed| >1. A decrease in Price  an increase in Total Revenue.

  • Demand is Unitary Elastic: %ΔQd = %ΔP;

ie |Ed| = 1. A Change in price  no change in Total Revenue.

  • Demand is Inelastic: %ΔQd < %ΔP;

i.e. |Ed| < 1. An increase in Price  an increase in Total Revenue.

determinants of price elasticity of demand
Determinants of Price Elasticity of Demand
  • Number & Closeness of Substitutes.
  • Information about price change and availability of substitutes.
  • Percentage of Income Spent on good.
  • Period of time: Second Law of Demand: Demand is more elastic over a longer period of time.