$ D Q/yr Review of Demand Economics – allocation of scarce resources to the unlimited wants of people Demand is a schedule of the maximum quantity consumed at alternative prices

$ D1D1 Q/yr Demand Change in Demand What changes (shifts) demand? –Income (1-3% growth annually) –Population (1-2% growth annually) –Prices of other goods –Tastes & preferences D 2 D 0

$ P 1 D q 1 Q/yr Demand P P qq 2 2 Change in quantity demanded –Change in quantity demanded occurs due to change in own price

Demand Elasticity of Demand –Own price elasticity of demand %Change in Q Y / %Change in P Y E = %ΔQY / % ΔPY How do you interpret E = What is Inelastic (Insulin) What is Elastic (Vacation Cruises) Factors that influence Elasticity –Necessity –Availability of Substitutes

Demand Elasticity of Demand –Domestic demand –Export demand Why more elastic? $ Q/yr. TD DD

Demand Other Elasticity Measures –Cross price elasticity of demand %ΔQY / % ΔPX Substitutes Complements –Income elasticity of demand %ΔQY / % ΔI Normal Goods Inferior Goods

Demand The limits of Elasticity Measures –Difficult to measure demand –Difficult to sort out cause/effect

Demand Why are measures of elasticity important –Predict Policy Impacts –Revenue impact Px Px Qx D ? E d = ? Qx D E d = = %∆QY / %∆PY = %∆QY / = %∆QY 8 * = = %∆QY / %∆PY = %∆QY / = %∆QY 8 * = 9.0

Demand Own Price elasticity of demand (Ed) for policy analysis New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Own Price) Or New Qt Y Demanded = Old Qt Y Dem. * [1+ Ed * (Price Y new – Price Y old ) / Price Y old ] If E(Qy,Py) = -.25 Calculate Qt DemandedPxQx D P Old 5 P New Q old ?

Demand Cross Price elasticity of demand (Ed) for policy analysis - - Substitutes New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Price for Other Commodity) Or New Qt X Demand = Old Qt X Demand *[1+Ed*(PriceY new –PriceY old ) / PriceY old ] If E(Qx,Py) = 0.15 Calculate Qt Demanded 10PyQx Dx wrt Py 6 5

Demand Cross Price elasticity of demand (Ed) for policy analysis - - Complements New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Price for Other Commodity) OR New Qt X Demand = Old Qt X Demand *[1+Ed*(PriceY new –PriceY old ) / PriceY old ] If E(Qx,Py) = Calculate Qt DemandedPyQx D

Demand Income elasticity of demand (Ed) for policy analysis New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Income) Or write it as: New Qt Demanded = Old Qt Demanded * [1+ Ed * (Income new –Income old ) / Income old ] If E(Qx,Inc) = 0.2 Calculate Qt Demanded Income Qx Dx wrt Income 26,000 25, mbu