Chapter 3 Supply, Demand, and Elasticity Introduction to Economics (Combined Version) 5th Edition.

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Presentation transcript:

Chapter 3 Supply, Demand, and Elasticity Introduction to Economics (Combined Version) 5th Edition

The Demand Curve  The price elasticity of demand is the ratio of the percentage change in the quantity of a good demanded to a given percentage change in its price.  The midpoint formula for calculating price elasticity of demand is as follows:

Introduction to Economics (Combined Version) 5th Edition Elastic and Inelastic Demand  The relationship between price and revenue along a given demand curve depends on whether demand is elastic, inelastic, or unit elastic.

Introduction to Economics (Combined Version) 5th Edition Changes in Elasticity  Elasticity of demand changes along a straight-line demand curve as shown in part a of the diagram.  A constant-elasticity demand curve has the shape shown in part b of the diagram.

Introduction to Economics (Combined Version) 5th Edition Income Elasticity of Demand  Income elasticity of demand is the percentage change in quantity demand associated with a given percentage change in income.  It is calculated using the formula shown below.  Income elasticity of demand is positive for a normal good and negative for an inferior good.

Introduction to Economics (Combined Version) 5th Edition Examples of Price Elasticity of Supply  Price elasticity of supply, like price-elasticity of demand, is calculated using the midpoint formula, as in these examples.

Introduction to Economics (Combined Version) 5th Edition Effect of Prohibition on Market for DDT Suppose that supply and demand for DDT are elastic, and that use of DDT is prohibited.  If the prohibition is strongly enforced, the supply curve will shift to S 3, and revenue from sale of DDT will fall to zero.  If the prohibition is weakly enforced (S 2 ), some DDT will be sold but revenue will decrease. Supply and Demand for DDT Strong prohibition Weak prohibition Legal supply

Introduction to Economics (Combined Version) 5th Edition Effect of Prohibition on Market for Cocaine Suppose the demand for cocaine is inelastic.  Sale of cocaine is prohibited, but the prohibition is not completely effective, shifting the supply curve from S 1 to S 2.  As a result of prohibition, the total revenue from cocaine increases (PXQ at E 2 compared with PXQ at E 1 ).  Some of the revenue is profit for drug dealers, some the extra cost of selling an illegal good. Supply and Demand for Cocaine Legal supply Prohibition