1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Copyright Mark Van Couwenberghe, 201794
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:
Extra info on price elasticity
PRICE MECHANISM ON COMPETITIVE MARKETS

9. 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

10. 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

11. 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

12. Government interventions on the market (price regulation):
Copyright Mark Van Couwenberghe, 2017 98
Government interventions
on the market (price regulation):
“Binge drinking”
Government interventions: introduction
PRICE MECHANISM ON COMPETITIVE MARKETS

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Your vocabulary list