The music is from Willie Nelson’s album, “Super Hits” (1994) Please enjoy The Market Strikes Back & Elasticity Welcome to Unit 4

$ 0 Low Price High Price Very Few Many Q D1 Consumers of coffee beans - DEMAND Slide 2

| | | | | | | | | | | $ 0 Low Price High Price Very Few Many Q - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $1 D1 D2 Why would curve shift right? 1.MORE consumers 2.Increased INCOME 3.More TASTE for this item 4.Changed EXPECTATIONS 5.Increase in price of the SUBSTITUTE product Demand curve SHIFTED to the RIGHT because MORE are demanded at EVERY price Slide 3

$ 0 Low Price High Price Very Few Many Q - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $ | | | | | | | | | | | S1 SUPPLIERS of coffee beans Slide 4

$ 0 Low Price High Price Very Few Many Q -- $11 -- $10 - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $ | | | | | | | | | | | S1 Supply curve SHIFTED to the RIGHT because MORE are SUPPLIED at EVERY price Why would curve shift RIGHT ? 1.More SUPPLIERS 2.Decreased INPUT prices 3.Improved TECHNOLOGY 4.Changed EXPECTATIONS 5.Decrease in price of the RELATED product (gasoline and heating oil) S2 Slide 5

$ 0 Low Price High Price Very Few Many Q - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $ | | | | | | | | | | | S1S1 S1 D1 Slide 6

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The Market Strikes Back Unit 4 Slide 11

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Elasticity Unit 4 Slide 44

Problem: You are in charge of pricing. Your company is now charging $10 per unit And it sells 1,000 units, for a revenue of $10,000. Your boss wants you to generate more revenue. Do you INCREASE the price, or lower the price? Slide 45

0 Low Price High Price Very Few Many Slide 46 D1

0 Low Price High Price Very Few Many Slide 47 D1

0 Low Price High Price Very Few Many Slide 48 D1

0 Low Price High Price Very Few Many Slide 49 D1

0 Low Price High Price Very Few Many Slide 50 D1

0 Low Price High Price Very Few Many Slide 51 D1

0 Low Price High Price Very Few Many Slide 52 D1

0 Low Price High Price Very Few Many Slide 53 D1 1,000 $ 10 1,000 * $ 10 = TR of $10,000

0 Low Price High Price Very Few Many Slide 54 D1 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,000

0 Low Price High Price Very Few Many Slide 55 D1 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,

0 Low Price High Price Very Few Many Slide 56 D1 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10, * $ 11 = TR of $10,

0 Low Price High Price Very Few Many Slide 57 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10, * $ 11 = TR of $10, D pe1

0 Low Price High Price Very Few Many Slide 58 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10, * $ 11 = TR of $10, D pe1 Percent change in quantity demanded = price elasticity Percent change in price = = ---- = -.9 = price elasticity 11 – 10 1 (almost 1)

0 Low Price High Price Very Few Many Slide 59 D1 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,000

0 Low Price High Price Very Few Many Slide 60 D1 $ 10 $ 11 1,000 * $ 10 = TR of $10, * $ 11 = TR of $10, ,000

0 Low Price High Price Very Few Many Slide 61 $ 10 $ 11 1,000 * $ 10 = TR of $10, * $ 11 = TR of $10, ,000 D pe<1

0 Low Price High Price Very Few Many Slide 62 D1 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 1,000

0 Low Price High Price Very Few Many Slide 63 D1 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 1, * $ 11 = TR of $9,

0 Low Price High Price Very Few Many Slide 64 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 1, * $ 11 = TR of $9, D pe>1

0 Low Price High Price Very Few Many D pe0 Slide 65 D pe∞ D pe1 D pe>1 D pe<1 D pe0 D pe∞ D pe1 D pe>1 D pe<1

0 Low Price High Price Very Few Many D pe0 Slide 66 D pe0 Perfectly Inelastic demand

0 Low Price High Price Very Few Many Slide 67 D pe∞ Perfectly elastic demand

Problem: You are in charge of pricing. Your company is now charging $10 per unit And it sells 1,000 units, for a revenue of $10,000. Your boss wants you to generate more revenue. Do you INCREASE the price, or lower the price? Slide 68

Do a series of pricing experiments Measure sales at starting price Change price by given amount in a test location Measure change in demand Change price again by a different amount Measure new change in demand Compare numbers and compute price elasticity of demand. Use computed D pe to compute optimum price. Slide 69

Other Elasticity subjects: -Income elasticity of demand -Normal good versus an inferior good (Big Mac vs T-bone steak) -Complimentary goods (coffee & donuts) -Cross price elasticity (coffee & tea) -Price elasticity of SUPPLY Slide 70

Slide 71 This week’s Discussion Topic

Slide 72 This week’s Assignment

Slide 73 This week’s Assignment Consumer surplus Supplier’s surplus Supplier’s surplus transferred from consumers Deadweight loss

Slide 74 This week’s Assignment Income elasticity of demand calculation, using midpoint method Consumer surplus Supplier’s surplus Supplier’s surplus transferred from consumers Deadweight loss

Slide 75 This week’s Assignment Income elasticity of demand calculation, using midpoint method Consumer surplus Supplier’s surplus Supplier’s surplus transferred from consumers Deadweight loss + the outline for your research paper

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Things that it may be helpful to remember when you get to the end of the course Slide 77

Things that it may be helpful to remember when you get to the end of the course A price floor or a price ceiling is an example of: a price control. Slide 78

Things that it may be helpful to remember when you get to the end of the course The minimum wage, which sets a lower limit on the wages that workers can earn, is often above the equilibrium price. The minimum wage is an example of: a price floor. Slide 79

Things that it may be helpful to remember when you get to the end of the course Government intervention in the form of price floors or price ceilings will: result in either surpluses or shortages. Slide 80

Things that it may be helpful to remember when you get to the end of the course An effective price ceiling will most likely result in which of the following? an increase in consumer surplus. Slide 81

Things that it may be helpful to remember when you get to the end of the course Price ceilings may be imposed if demanders can make strong moral or political arguments for lower prices. Slide 82

Things that it may be helpful to remember when you get to the end of the course When a price ceiling is imposed, this results in: inefficiency due to overconsumption of the good Slide 83

Things that it may be helpful to remember when you get to the end of the course Inefficient allocations of goods to consumers often result from: price ceilings. Slide 84

Things that it may be helpful to remember when you get to the end of the course A price ceiling on a good often results in: black market or underground transactions of the good. Slide 85

Things that it may be helpful to remember when you get to the end of the course A rent control scheme that would set a maximum amount of rent paid that is below the equilibrium rental price would most likely be supported by which of the following groups? people who wish to rent such an apartment Slide 86

Things that it may be helpful to remember when you get to the end of the course In the rental housing market, landlords determine the number of units rented. If a price control is present in the market, this control must be a: price ceiling. Slide 87

Things that it may be helpful to remember when you get to the end of the course An increase in producer surplus would occur if: an effective price floor was imposed. Slide 88

Things that it may be helpful to remember when you get to the end of the course Government may choose to impose a price floor if: suppliers can make strong moral or political arguments for higher prices. Slide 89

Things that it may be helpful to remember when you get to the end of the course An effective price floor would result in a surplus of the good. Slide 90

Things that it may be helpful to remember when you get to the end of the course If wages are set above the equilibrium wage in the market, then the number of workers hired will depend upon: employers. Slide 91

Things that it may be helpful to remember when you get to the end of the course An effective minimum wage ultimately means that: employees must demonstrate that they have characteristics greater than other potential employees even if they are willing to work at a lower wage. Slide 92

Things that it may be helpful to remember when you get to the end of the course An effective price floor will lead to: a resulting excess supply or a surplus. Slide 93

Things that it may be helpful to remember when you get to the end of the course A quota is essentially a: quantity restriction. Slide 94

Things that it may be helpful to remember when you get to the end of the course If government decides to control the amount of a good allowed into a market, this effectively will: increase incentives for market participants to engage in illegal or black market activities. Slide 95

Things that it may be helpful to remember when you get to the end of the course Which of the following statements is true? I.Quantity controls drive a wedge between the demand price and the supply price of the good. II. The difference between the demand and supply price at the quota limit is referred to as consumer surplus. III. Quantity controls have no undesirable side effects. Statement I is true. Slide 96

Things that it may be helpful to remember when you get to the end of the course Quotas often: lead to deadweight losses resulting from a wedge between the price of sellers and that of demanders. Slide 97

Things that it may be helpful to remember when you get to the end of the course The price elasticity of demand measures the responsiveness of the change in: quantity demanded to a change in price. Slide 98

Things that it may be helpful to remember when you get to the end of the course The price elasticity of demand is computed as the percentage change in: quantity demanded divided by the percentage change in price. Slide 99

Things that it may be helpful to remember when you get to the end of the course If demand is elastic, then: the quantity effect dominates the price effect, and a decrease in price causes total revenue to rise. Slide 100

Things that it may be helpful to remember when you get to the end of the course When the absolute value of the percentage change in quantity demanded is less than the absolute value of the percentage change in price, demand is: inelastic. Slide 101

Things that it may be helpful to remember when you get to the end of the course Suppose price is initially $20, but then decreases to $15. The absolute value of the percentage change in price (using the midpoint method) is: 28%. Slide 102

Things that it may be helpful to remember when you get to the end of the course If you wanted to make sure that your calculation of elasticity was consistent regardless of your initial point, you would use: the midpoint formula calculation of elasticity. Slide 103

Things that it may be helpful to remember when you get to the end of the course A demand curve that is perfectly inelastic is: vertical. Slide 104

Things that it may be helpful to remember when you get to the end of the course If the price elasticity of demand between two points on a demand curve is 0.75, then demand between those two points is: price-inelastic. Slide 105

Things that it may be helpful to remember when you get to the end of the course If the price elasticity of demand equals 0, then this means the demand curve is: vertical. Slide 106

Things that it may be helpful to remember when you get to the end of the course If the absolute value of the price elasticity of demand is greater than 1, this means: small percentage changes in price will lead to much larger changes in the percentage change in quantity demanded. Slide 107

Things that it may be helpful to remember when you get to the end of the course All of the following are characteristics of an elastic demand except: short time periods of adjustment. Slide 108

Things that it may be helpful to remember when you get to the end of the course The price of a gallon of gasoline increases 10% this year. As a result, which of the following events is most likely to occur? Gasoline expenditures will increase if gasoline is an inelastic good. Slide 109

Things that it may be helpful to remember when you get to the end of the course Goods A and B have a positive cross-price elasticity of demand. This means Goods A and B are: substitutes. Slide 110

Things that it may be helpful to remember when you get to the end of the course Suppose the cross-price elasticity between two goods is 1.5. If the price of one good increases by 10%, then the quantity demanded of the other good will: increase by 15%. Slide 111

Things that it may be helpful to remember when you get to the end of the course Jessica experienced an increase in her income by 10% this year. In the same year, Jessica's quantity demanded of milk increased by 10% and her quantity demanded for bread increased by 5%. This means that for Jessica: both milk and bread are normal goods Slide 112

Things that it may be helpful to remember when you get to the end of the course The price of coffee increases by 10%, and as a result, Alex purchases less donuts. This suggests that to Alex, coffee and donuts are: complements. Slide 113

Things that it may be helpful to remember when you get to the end of the course If the percentage change in the quantity demanded of a good is greater than the percentage change in income, then this good will have an income elasticity: greater than 1 and it is a normal good. Slide 114

Things that it may be helpful to remember when you get to the end of the course One would expect to see supply become more price ________ as harvest season approaches and crops are being brought in from the fields. -elastic Slide 115

Things that it may be helpful to remember when you get to the end of the course Tomas produces 100 units of Good Y when the price is $5 and 150 units of Good Y when the price is $7. What is the value of Tomas's price elasticity of supply? 1.2 Slide 116

Things that it may be helpful to remember when you get to the end of the course Decreases in input costs and the longer the length of time since a price change will tend to: increase the price elasticity of supply. Slide 117

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What to do this week! Read my announcements Read chapter 5 & 6 Post to the discussion (before Saturday night) Post to the discussion on 3 separate days Post to at least TWO classmates’ Discussion Do the assignment Do Research Outline Remember to include references Come to me when you have a question. Slide 119

Slide 120 Next week - Unit 5: The Rational Consumer

you can contact me through my through AOL Instant Messaging my AOL IM name is SamDiGiammarinoJ, (put me on your buddy list) my AOL IM “Office hours” are: Wednesdays 6:30-8:30 pm Eastern Time or through the Instructor’s “Virtual Office” link under the Course Home page Slide 121

T H A N K Y O U F O R A T T E N D I N G SEE YOU IN THE DISCUSSION THREAD QUESTIONS AND IN NEXT WEEK’S SEMINAR Slide 122