HOPE YOU ENJOYED THE AUTUMN HOLIDAYS  Copyright Mark Van Couwenberghe, 2017 87 HOPE YOU ENJOYED THE AUTUMN HOLIDAYS  Now, let us 1. refresh our memories on “price elasticity” and 2. add some knowledge And 3. then we will build a bridge to a new chapter  Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

a small game to train our memories Copyright Mark Van Couwenberghe, 2017 Price elasticity a small game to train our memories 88 Complete the definition of price elasticity of demand (using the concepts below) SCORE: /1 Price elasticity of demand measures the ……………….. change in ………………… of the ……………….. as a reaction to a ……………….. change in ……………….. consumer price relative demand relative Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

89 2 Which of these demand curves shows an inelastic demand? SCORE: /2 Copyright Mark Van Couwenberghe, 2017 89 2 Which of these demand curves shows an inelastic demand? SCORE: /2 Demand Demand Explain why? Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

90 Shop owner A increases the price of apples from Copyright Mark Van Couwenberghe, 2017 90 Shop owner A increases the price of apples from € 0,70 to € 0,80. Demand decreases from 16 to 14 kg. Shop owner B increases the price of apples from €0,65 to €0,72. Demand decreases from 24 to 21 kg. Which shop owner has the most price-elastic customers? SCORE: /3 Explain why? Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Below you will find a number of products. Will the demand for the products be rather elastic or inelastic? 91 SCORE: /4 Product E / I Your explanation bread product with many substitutes house repair on short term product with few substitutes product with low share in household expenditure (daily food) sports car product with high share in household expenditures (holiday trips) cigarettes house repair on long term Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

92 5 What is the price elasticity of demand in this case? SCORE: /5 Copyright Mark Van Couwenberghe, 2017 92 5 What is the price elasticity of demand in this case? SCORE: /5 Explain why? Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

you should also know these 3 things… Copyright Mark Van Couwenberghe, 2017 Price elasticity you should also know these 3 things… 93 Suppliers are very much interested in knowing the price elasticity of their product (fill-in the blank spaces) demand is elastic demand is inelastic supplier increases the price customers will buy a lot less >>> turnover decreases P x Q supplier decreases the price customers will buy not much more P x Q Extra info on price elasticity PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 94 2 The University of Leuven performed some research on price elasticity of demand; the university calculated the price elasticity for some products Can you link the product to the right price elasticity? 1 public transport A 1,63 2 hygiene/health products B 0,53 3 restaurant dinners C 0,42 4 cultural activities D 0,54 5 daily food E 1,00 6 energy (house) F 0,30 7 cigarettes G 1,08 The right combinations are: 1 2 3 4 5 6 7 Extra info on price elasticity PRICE MECHANISM ON COMPETITIVE MARKETS

95 Besides the price elasticity of demand, we can also mention the Copyright Mark Van Couwenberghe, 2017 95 Besides the price elasticity of demand, we can also mention the “income elasticity of demand” definition: the relative change in demand of the consumer as a reaction to a relative change in income formula: % change demand _______________ % change income normally: higher income means more consumption but the type of product will also be important Extra info on price elasticity PRICE MECHANISM ON COMPETITIVE MARKETS

96 income elasticity what type of product? + example explanation Copyright Mark Van Couwenberghe, 2017 96 income elasticity what type of product? + example explanation < 0 0 < E < 1 > 1 Engel's law is an observation in economics stating that as income rises, the proportion of income spent on necessity goods falls, even if absolute expenditure rises. In other words, the income elasticity of demand of necessity goods is between 0 and 1. Extra info on price elasticity PRICE MECHANISM ON COMPETITIVE MARKETS

Let’s now build a bridge to a new chapter  Copyright Mark Van Couwenberghe, 2017 97 Let’s now build a bridge to a new chapter  We know all about: Competitive markets The price mechanism on competitive markets Price elasticity and income elasticity But is the market price always the “right” price? governments sometimes think the market price is not right And they will do something about it… Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Government interventions on the market (price regulation): Copyright Mark Van Couwenberghe, 2017 98 Government interventions on the market (price regulation): “Binge drinking” https://www.youtube.com/watch?v=qA2yfl4LB6E Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

99 Let’s answer some basic questions: Copyright Mark Van Couwenberghe, 2017 99 Let’s answer some basic questions: 1 What is the definition of “binge drinking”? 2 What problems does it create - on short term? - on long term? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 100 3 What is the decision of the government in the battle against “binge drinking”? + what is the effect? 4 What could be a negative aspect of this decision? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 101 Minimum price If a government considers the market price of a product being TOO LOW, because the consumption creates problems at the scale of the whole society, they can decide to set a MINIMUM PRICE Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

102 Situations Let us look at the following situations: what? Copyright Mark Van Couwenberghe, 2017 102 Situations Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

103 Situations Let us look at the following situations: what? Copyright Mark Van Couwenberghe, 2017 103 Situations Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

104 Situations Let us look at the following situations: what? Copyright Mark Van Couwenberghe, 2017 104 Situations Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

105 Situations Let us look at the following situations: what? Copyright Mark Van Couwenberghe, 2017 105 Situations Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Government intervention: Copyright Mark Van Couwenberghe, 2017 106 Government intervention: overview Government intervention 1 Minimum price 2 Maximum price 3 Taxes 4 Subsidies 5 Quota Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

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