Presentation is loading. Please wait.

Presentation is loading. Please wait.

Elastic and Inelastic Demand (a)

Similar presentations


Presentation on theme: "Elastic and Inelastic Demand (a)"— Presentation transcript:

1 Elastic and Inelastic Demand (a)
Price elasticity of demand shows how responsive consumers are to price changes. elastic demand means % change in quantity demanded is more than % change in price inelastic demand means % change in quantity demanded is less than % change in price unit-elastic demand means % change in quantity demand equals % change in price Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

2 Elastic and Inelastic Demand (b) Figure 3.1 Page 61
Elastic Demand Curve for Ice Cream Cones Inelastic Demand Curve for Ice cream Cones 2.40 2.40 20% 20% 2.00 2.00 D1 1.60 1.60 D2 50% Price ($ per cone) 1.20 Price ($ per cone) 1.20 10% 0.80 0.80 0.40 0.40 500 1000 500 1000 Quantity Demanded (cones per winter month) Quantity Demanded (cones per summer month) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

3 Perfectly Elastic and Perfectly Inelastic Demand (a)
Perfectly elastic demand means a constant price and a horizontal demand curve. Perfectly inelastic demand means a constant quantity demanded and a vertical demand curve. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

4 Perfectly Elastic and Perfectly Inelastic Demand (b) Figure 3
Perfectly Elastic and Perfectly Inelastic Demand (b) Figure 3.2 Page 62 Perfectly Elastic Demand Curve for Soybeans Perfectly Inelastic Demand Curve for Insulin D4 1.60 D3 Price ($ per tonnes) Price ($ per tonnes) 1000 Quantity Demanded (tonnes) Quantity Demanded (litres) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

5 Total Revenue and the Price Elasticity of Demand (a)
A price change causes total revenue to change in the opposite direction when demand is elastic. A price change causes total revenue to change in the same direction when demand is inelastic. A price change does not affect total revenue when demand is unit-elastic. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

6 Revenue Changes with Elastic Demand Figure 3.3 Page 63
Demand Curve for DVDs 5 4 A 3 Price ($ to rent a DVD) D 2 B C 1 500 1000 1500 Quantity Demanded (DVDs rented each day) As price increases – total revenue decreases Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

7 Revenue Changes with Inelastic Demand Figure 3.4 Page 64
Demand Curve for Amusement Park Rides 5 4 3 Price ($ per ride) E 2 D 1 F G 2000 4000 6000 8000 10 000 Quantity Demanded (riders each day) As price increases – total revenue increases Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

8 Total Revenue and the Price Elasticity of Demand (b) Figure 3
Total Revenue and the Price Elasticity of Demand (b) Figure 3.5 Page 64 Demand Elasticity and Changes in Total Revenue Elastic Demand Inelastic Demand Unit-Elastic Demand Price Change up down Change in Total Revenue down up unchanged Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

9 Determinants of the Price Elasticity of Demand
There are four determinants: portion of consumer incomes (products with smaller portions more inelastic) access to substitutes (products with more substitutes more elastic) necessities versus luxuries (more inelastic for necessities and more elastic for luxuries) time (more elastic with the passage of time) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

10 Calculating Price Elasticity of Demand
A numerical value for price elasticity of demand (ed) is found by taking the ratio of the changes in quantity demanded and in price, each divided by its average value. In mathematical terms: ed = ΔQd ÷ average Qd Δprice ÷ average price The sign will be negative (-) proving the law of demand. Inverse relationship between Quantity demanded and Price Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

11 Elasticity and a Linear Demand Curve (a)
A linear demand curve has a different price elasticity (ed) at every point. At high prices, the change in quantity demanded ( is relatively large relative to average quantity demanded ,giving a large ed. Elastic At low prices, the change in quantity demanded is relatively small relative to average quantity demanded, giving a small ed. Inelastic Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

12 Income Elasticity Income elasticity (ei) is the responsiveness of a product’s quantity demanded to changes in consumer income. In mathematical terms: ei = ΔQd ÷ average Qd ΔI ÷ average I Positive sign (+)shows a direct relationship, thus the product is a normal product. Negative sign (-) shows an inverse relationship, thus the product is an inferior product. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

13 Cross-Price Elasticity
Cross-price elasticity (ei) is the responsiveness of the quantity demanded of one product (x) to a change in price of another (y). In mathematical terms: exy = ΔQdx ÷ average Qdx ΔPy ÷ average Py Positive sign indicates substitute product. (direct relationship) Negative sign indicates complementary product (inverse relationship) ex. price CD players goes up demand of CDs goes down Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

14 Elastic and Inelastic Supply
Price elasticity of supply measures the responsiveness of quantity supplied to price changes. Elastic supply means % change in quantity supplied is more than % change in price. Inelastic supply means % change in quantity supplied is less than % change in price. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

15 Elastic and Inelastic Supply Figure 3.7, Page 70
Elastic Supply Curve for Tomatoes Inelastic Supply Curve For Tomatoes 4 4 S2 S1 3 3 50% 50% Price ($ per kilogram) Price ($ per kilogram) 2 2 100% 20% 1 1 200000 Quantity Supplied (kilograms per year) Quantity Supplied (kilograms per year) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

16 Perfectly Elastic and Perfectly Inelastic Supply
Perfectly elastic supply means a constant price and a horizontal supply curve. Perfectly inelastic supply means a constant quantity supplied and a vertical supply curve. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

17 Time and the Price Elasticity of Supply (a)
Price elasticity of supply changes over three production periods: Supply is perfectly inelastic in the immediate run. Supply is either elastic or inelastic in the short run. Supply is perfectly elastic for a constant-cost industry and very elastic for an increasing-cost industry in the long run. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

18 Time and the Price Elasticity of Supply (b) Figure 3
Time and the Price Elasticity of Supply (b) Figure 3.8, Page 71 (continued in part (e)) Immediate-Run Supply Elasticity for Strawberries Short-Run Supply Elasticity For Strawberries S2 2.50 S1 2.00 Price ($ per kilogram) Price ($ per kilograms) 9 11 Quantity Supplied (kilograms per month) Quantity Supplied (millions of kilograms per year) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

19 Time and the Price Elasticity of Supply (c)
If strawberries are produced in a constant-cost industry: A higher price of strawberries raises production but not resource prices. As new businesses enter the industry in the long run due to a higher price of strawberries, this price is gradually pushed back down to its original level. Therefore the long-run supply curve for a constant-cost industry is perfectly elastic. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

20 Time and the Price Elasticity of Supply (d)
If strawberries are produced in a increasing-cost industry: A higher price of strawberries raises production and also resource prices. As new businesses enter the industry in the long run due to a higher price of strawberries, this price is gradually pushed back down to its lowest possible level, but this level is higher than it was originally. Therefore the long-run supply curve for an increasing-cost industry is very elastic. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

21 Time and the Price Elasticity of Supply (e) Figure 3
Time and the Price Elasticity of Supply (e) Figure 3.8, Page 71 (continued from part (b)) Long-Run Supply Elasticity S4 Constant- cost Industry 2.00 S3 Increasing- cost Industry Price ($ per kilograms) Quantity Supplied (millions of kilograms per decade) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

22 Calculating Price Elasticity of Supply
A numerical value for price elasticity of supply (es) is found by taking the ratio of the changes in quantity supplied and in price, each divided by its average value. In mathematical terms: es = ΔQs ÷ average Qs Δprice ÷ average price Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

23 Excise Taxes (a) An excise tax is a tax on a particular product expressed as a dollar amount per unit of quantity. Such a tax creates a new supply curve (S1) seen by consumers. It is vertically above the initial supply curve (S0) seen by producers. The reason for this difference is that the price as seen by consumers is now higher than that seen by producers. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

24 Excise Taxes (b) The after-tax price for consumers is found where S1 crosses the demand curve. The after-tax equilibrium price for producers is the corresponding price on S0. The total tax paid by consumers is found by multiplying their tax-induced price rise by after-tax quantity. Similarly, the total tax paid by producers is found by multiplying their corresponding price drop by after-tax quantity. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

25 The Impact of an Excise Tax Figure 3.9, page 74
(millions of tonnes) Quantity Supplied Demanded (D) (S0) S0 D Market Demand and Supply Curves For Strawberries Price ($ per tonne) 3.00 2.50 2.00 1.50 1.00 0.50 3.50 1 3 5 7 9 11 13 15 Quantity (millions of kg per year) Price ($ per kg) The Impact of an Excise Tax 4.00 c S1 b $1 a d A B (S1) 5 7 9 11 13 13 11 9 7 5 9 7 5 3 1 Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

26 The Effect of Elasticity
For a given supply curve, the more elastic the demand curve the greater the proportion of an excise tax paid by producers. Quantity demanded will decrease by a greater percentage than the price increase. For a given demand curve, the more elastic the supply curve the greater the proportion of an excise tax paid by consumers. Quantity supplied will decrease by a greater percentage than price increase. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

27 Excise Taxes and Demand Elasticity Figure 3.10, page 75
Elastic Demand S1 Inelastic Demand S1 S0 D c b $1 b $1 S0 D c a d A B A B d a 2.75 2.25 2.00 2.00 Price ($ per kg) Price ($ per kg) 1.75 1.25 6 9 8 9 Quantity (millions of kg per year) Quantity (millions of kg per year) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

28 Excise Taxes and Supply Elasticity Figure 3.11, page 76
Elastic Supply Inelastic Supply S1 a S0 D S0 D S1 a b $1 2.75 d A B 2.25 2.00 c 2.00 Price ($ per kg) 1.75 Price ($ per kg) 1.25 6 9 8 9 Quantity (millions of kg per year) Quantity (millions of kg per year) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

29 Price Controls A price floor is a minimum price set above the equilibrium price. It results in a surplus in the market. A price ceiling is a maximum price set below the equilibrium price. It results in a shortage in the market. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

30 Agricultural Price Supports
Price supports for agricultural goods are an example of a price floor. They help overcome unstable agricultural prices. Farmers win from these supports. Consumers and taxpayers lose from these supports. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

31 Reasons for Price Supports Figure 3.12, page 78
Market Demand and Supply Curves for Wheat Market Demand and Supply Schedules for Wheat S1 S0 140 b Price ($ per tonne) Quantity Demanded Quantity Supplied 120 100 a (D) (S0) (S1) 80 (millions of tonnes) Price ($ per tonne) 60 D $140 120 100 80 60 10 11 12 13 14 14 13 12 11 10 12 11 10 9 8 40 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity (millions of tonnes per year) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

32 Effects of Price Supports Figure 3.14, page 79
Market Demand and Supply Curves for Milk Market Demand and Supply Schedules for Milk surplus S 1.30 Price ($ per litre) Quantity Demanded (D) Quantity Supplied (S) 1.10 (millions of litres) Price ($ per litre) .90 $1.30 59 62 A price floor creates a surplus. D .70 1.10 60 60 0.90 61 58 58 60 61 62 Quantity (millions of litres per year) 59 Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

33 Rent Controls Rent controls are an example of a price ceiling.
They keep down prices of controlled rental accommodation. Some (especially middle-class) tenants win from these controls. Other (especially poorer) tenants lose from these controls. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

34 Effects of Rent Controls Figure 3.15, page 80
Market Demand and Supply Curves for Units Market Demand and Supply Schedules for Units S Price ($ rent per month) Quantity Demanded (D) Quantity Supplied (S) 700 A price ceiling creates a shortage. 500 (units rented per month) Price ($ per unit) 300 $700 1700 2500 shortage 500 2000 2000 D 300 2300 1500 1500 2000 2300 2500 Quantity (units rented per month) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

35 Prophet of Capitalism’s Doom
According to Karl Marx’s theory of exploitation: a product’s price is based on the amount of labour that goes into producing it capitalists cut costs by minimizing workers’ wages and by maximizing the length of the workday capitalists keep any surplus value, which is the excess of their revenues over their costs Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

36 Marx’s Theory of Exploitation Figure A, Page 87
Creation of Surplus Value (when producing 2 shirts or 1 suit) Creation of Surplus Value 80 Daily Wage Value produced ($ per day) 20 40 60 $50 Wage $50 $10 $20 $80 2 5 $30 Wage $30 $10 $40 $80 4 3 W = 50 M = 10 SV = 10 SV = 40 W = 10 W = 30 Daily Wage Materials and machine wear and tear (M) Surplus Value (SV) Total Value Exploitation Rate (SV/W) $50 $30 Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

37 For the Public Good (OLC)
Besides intervening in private markets, Canadian governments have an independent role. Government programs include payments to adults with children, retirement funds for the elderly, unemployment insurance, welfare, higher education subsidies, free health care and schooling, and subsidized public housing. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

38 For the Public Good (OLC) Federal Spending
The main federal spending programs are: transfer payments to seniors (the Seniors Benefit) tax credits to low-income parents (the Child Tax Credit) transfer payments to the unemployed (Employment Insurance) pensions (the Quebec and Canada Pension Plans) Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

39 For the Public Good (OLC) Provincial and Territorial Spending
The responsibilities of provincial and territorial governments include: health care subsidies for post-secondary education welfare services The federal government pays a portion of these costs through the Canada Health and Social Transfer (CHST). Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

40 For the Public Good (OLC) Government Expenditures Figure A
Federal (2009) ($ billions) Provincial (2009) ($ billions) Local (2009) ($ billions) Goods and services Transfers to Persons Businesses Nonresidents Provinces and local Debt charges 63.9 87.9 4.5 4.8 65.1 26.1 253.1 Goods and services Transfers to Persons Businesses Governments Debt charges 214.1 43.1 11.1 52.5 28.3 349.2 Goods and services Transfers to Persons Businesses Provinces Debt Charges 109.1 4.0 2.2 0.1 3.5 118.9 Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

41 For the Public Good (OLC) Taxation (a)
Canadian governments use five main types of taxation: Personal income taxes are levied by both federal and provincial governments, and are based on four marginal federal tax rates (15%, 22%, 26%, and 29%). Sales taxes are levied by both federal and provincial governments, and are charged as a percentage of price on a wide range of products. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

42 For the Public Good (OLC) Taxation (b)
Excise taxes are levied by both federal and provincial governments, and are usually charged as a dollar amount per unit of quantity on particular products. Property taxes are charged by local governments on buildings and land. Corporate income taxes are paid by corporations to both federal and provincial governments as a percentage of annual profits. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

43 Gross Domestic Product
For the Public Good (OLC) Tax Revenues for All Levels of Government (2009) Figure B Percent of Gross Domestic Product 11.5 8.7 3.2 2.5 4.6 30.5 Percent of Total Taxes 37.6 28.4 10.5 8.2 15.0 100.0 Personal income taxes Sales and excise taxes Property taxes Corporate income taxes Miscellaneous taxes Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

44 For the Public Good (OLC) Taxes and the Canadian Economy Figure C
Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

45 For the Public Good (OLC) Debates over Government’s Role (a)
Taxes have increased significantly as a proportion of the total Canadian economy over the past few decades. Critics argue that taxes and some spending programs reduce productive activity. Critics also contend that many government programs are inequitable, and hampered by administrative problems. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

46 For the Public Good (OLC) Debates Over Government’s Role (b)
Supporters of government admit that public spending and taxation are not as effective as they could be. But they argue that these problems need to be seen in perspective, given that private markets are also subject to a variety of flaws. Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

47 Understanding Economics 6th edition by Mark Lovewell
Chapter 3 The End Copyright © 2012 by McGraw-Hill Ryerson Limited. All rights reserved.


Download ppt "Elastic and Inelastic Demand (a)"

Similar presentations


Ads by Google