1. Macroeconomics Lesson 2

2. Topics 1. Homework 2. Review Supply and Demand 3. Floors and Ceilings 4. Elasticity

3. Correct the Homework Answers: 1. P = $7.50 Q = 350 2. P = 55¢Q = 570 3. P = $375 Q = 85 4. P= $1375 Q= 17

4. Another S & D example PriceQ dPriceQ s 600 500 5010050400 4020040300 3030030200 2040020100 10500100

5. Answer: Price = $35, Quantity = 250 What happens to price and quantity if the price of a substitute good increases? What happens to price and quantity if the cost of production decreases?

6. Floors and Ceilings See the examples on the board.

7. Price Elasticity of Demand Measures the sensitivity or (responsiveness) of quantity consumers demand to changes in the price of a product

8. Equation for Coefficient of Elasticity of Demand % change in quantity ÷ % change in price The equation for determining the coefficient elasticity of demand is: [(Q1-Q2)÷(Q1+Q2)]÷[(P1-P2)÷(P1+P2)]

9. Examples 1. Q1 = 250 Q2 = 300 P1=50 P2=40 Answer = 0.81 ( <1, inelastic) 2. Q1 = 250 Q2 = 500 P1 = $6 P2=$5 Answer = 3.66 (>1, elastic) 3. Q1 = 250 Q2 = 300 P1 = $6 P2=$5 Answer = 1 (unit elastic)

10. More examples 4. Q1 = 500 Q2 = 500 P1 = $6 P2=$5 Answer = 0 (perfectly inelastic) 5. Q1 = 500 Q2 = 600 P1 = $5 P2=$5 Answer = undefined (perfectly elastic)

11. Sesame Street School of Ed A key to identifying elastic or inelastic demand is the shape of the Demand Curve: The more the curve looks like a capital I, the more inelastic the demand, and the fewer the substitutes The more the curve looks like a capital E, the more elastic the demand, and there must be many substitutes

12. Uses of Elasticity of Demand We can use Elasticity of Demand to determine the price where we Maximize Total Revenue Remember the equation for Total Revenue TR = Price x Quantity

13. Other uses for Ed Tax incidence: who pays the tax? Predict the change in quantity from a change in price Evaluate the effectiveness of social policies

14. Circular Flow