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

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

3. 1 2 3 4 5 6 7 8 9 10 11 | | | | | | | | | | | $ 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

4. $ 0 Low Price High Price Very Few Many Q - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $1 1 2 3 4 5 6 7 8 9 10 11 | | | | | | | | | | | S1 SUPPLIERS of coffee beans Slide 4

5. $ 0 Low Price High Price Very Few Many Q -- $11 -- $10 - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $1 1 2 3 4 5 6 7 8 9 10 11 | | | | | | | | | | | 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

6. $ 0 Low Price High Price Very Few Many Q - $ 9 - $ 8 - $ 7 - $ 6 - $ 5 - $ 4 - $ 3 - $2 - $1 1 2 3 4 5 6 7 8 9 10 11 | | | | | | | | | | | S1S1 S1 D1 Slide 6

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11. The Market Strikes Back Unit 4 Slide 11

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44. Elasticity Unit 4 Slide 44

45. 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

46. 0 Low Price High Price Very Few Many Slide 46 D1

47. 0 Low Price High Price Very Few Many Slide 47 D1

48. 0 Low Price High Price Very Few Many Slide 48 D1

49. 0 Low Price High Price Very Few Many Slide 49 D1

50. 0 Low Price High Price Very Few Many Slide 50 D1

51. 0 Low Price High Price Very Few Many Slide 51 D1

52. 0 Low Price High Price Very Few Many Slide 52 D1

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

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

55. 0 Low Price High Price Very Few Many Slide 55 D1 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 909

56. 0 Low Price High Price Very Few Many Slide 56 D1 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 909 * $ 11 = TR of $10,000 909

57. 0 Low Price High Price Very Few Many Slide 57 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 909 * $ 11 = TR of $10,000 909 D pe1

58. 0 Low Price High Price Very Few Many Slide 58 1,000 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 909 * $ 11 = TR of $10,000 909 D pe1 Percent change in quantity demanded ---------------------------------------------------- = price elasticity Percent change in price 909-1000 - 91 ------------- -------- -.09 1000 1000 -------------- = ------------ = ---- = -.9 = price elasticity 11 – 10 1 (almost 1) ---------- -----.10 10 10

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

60. 0 Low Price High Price Very Few Many Slide 60 D1 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 975 * $ 11 = TR of $10,725 975 1,000

61. 0 Low Price High Price Very Few Many Slide 61 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 975 * $ 11 = TR of $10,725 975 1,000 D pe<1

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

63. 0 Low Price High Price Very Few Many Slide 63 D1 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 1,000 850 * $ 11 = TR of $9,350 850

64. 0 Low Price High Price Very Few Many Slide 64 $ 10 $ 11 1,000 * $ 10 = TR of $10,000 1,000 850 * $ 11 = TR of $9,350 850 D pe>1

65. 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

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

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

68. 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

69. 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

70. 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

71. Slide 71 This week’s Discussion Topic

72. Slide 72 This week’s Assignment

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

74. 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

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

78. 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

79. 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

80. 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

81. 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

82. 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

83. 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

84. 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

85. 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

86. 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

87. 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

88. 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

89. 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

90. 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

91. 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

92. 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

93. 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

94. 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

95. 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

96. 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

97. 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

98. 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

99. 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

100. 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

101. 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

102. 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

103. 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

104. 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

105. 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

106. 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

107. 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

108. 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

109. 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

110. 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

111. 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

112. 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

113. 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

114. 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

115. 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

116. 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

117. 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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119. 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

120. Slide 120 Next week - Unit 5: The Rational Consumer

121. you can contact me through my email: EDiGiammarino@kaplan.edu,EDiGiammarino@kaplan.edu 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

122. 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