1. $ 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

2. $ 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

3. $ P 1 D q 1 Q/yr Demand P P 1 0 0 qq 2 2 Change in quantity demanded –Change in quantity demanded occurs due to change in own price

4. 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 = -0.25 What is Inelastic (Insulin) What is Elastic (Vacation Cruises) Factors that influence Elasticity –Necessity –Availability of Substitutes

5. Demand Elasticity of Demand –Domestic demand –Export demand Why more elastic? $ Q/yr. TD DD -.60-1.14

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

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

8. Demand Why are measures of elasticity important –Predict Policy Impacts –Revenue impact Px Px Qx D 5 4.5 8.0? E d = -0.25 5 4.5 8.0 ? Qx D E d = -1.25 -0.25 = %∆QY / %∆PY -0.25 = %∆QY / -10 2.5 = %∆QY 8 * 1.025 = 8.2 -1.25 = %∆QY / %∆PY -1.25 = %∆QY / -10 12.5 = %∆QY 8 * 1.125 = 9.0

9. 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 4.5 8.0 Q old ?

10. 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

11. 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) = -0.15 Calculate Qt DemandedPyQx D 6 5 10

12. 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 25,000 600mbu