Market Equilibrium and Elasticity

8/19/2019 Market Equilibrium and Elasticity

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Market Equilibrium and

Elasticity


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Short QuizSuppose the annual demand for nokia cellphone in the Philippines is

described by the equation:Qd = 5. ! ".#P

$here Qd is the number of nokia cellphones demanded per year %in millions&'hen P is the a(era)e price of a nokia cellphone %in thousand pesos&.

Problem:a. $hat is the quantity of nokia cellphone demanded per year 'hen the

a(era)e price of a nokia cellphone is P#5* $hen it is P+5* $hen it is P5*Make a demand schedule. %,pts.&

b. Sketch the demand cur(e for nokia cellphones. %,pts.&

c. -eteris paribus sho' 'hat happens to the demand cur(e )i(en anincrease in people/s income %#pt& a decrease in the price of cherry mobilecellphone %#pt&.

d. 0f the price of a nokia cellphone is e1pected to increase ne1t year 'hathappens to its demand this year* Sho' it in a )raph %#pt.&


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Short QuizSuppose the annual supply of nokia cellphone in the Philippines is

described by the equation:Qs = #52".5P

$here Qs is the quantity of nokia cellphone produced in the Philippinesper year %in millions& 'hen P is the a(era)e price of nokia cellphone .

Problem:a. $hat is the quantity of nokia cellphone supplied per year 'hen the

a(era)e price is P#5* $hen it is P+5* $hen it is P5* Make a supplyschedule %,pts.&

b. Sketch the supply cur(e for nokia cellphone %3pts.&.

c. -eteris paribus sho' 'hat happens to the supply cur(e 'hen the)o(ernment increases the ta1 for cellphone %supplier shoulders theta1& %#pt&.

d. -eteris Paribus sho' 'hat happens to the supply cur(e 'hen inputprices increase %#pt.&.


4/30

Market Equilibrium

• Market equilibrium: quantitydemanded equals quantity supplied

•

Equilibrium Price %p4& is price at'hich quantity supplied = quantitydemanded %Qs=Qd&

• Equilibrium Quantity %q4& is quantitycorrespondin) to equilibrium price


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Market Equilibrium

• i(en the demand and supplyequations ho' do you compute forthe equilibrium price*

• Qd = 65 2 .5P•

Qs = #" ! #.5P


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Market 7isequilibrium

• $hen price is set abo(e or belo' theequilibrium price there 'ill be asurplus or shorta)e of )oods.

• E1cess Supply %Market Surplus& ! asituation 'here quantity suppliede1ceeds quantity demanded.

• E1cess 7emand %Market Shorta)e& ! asituation 'here quantity demandede1ceeds quantity supplied.


7/30

Market 7isequilibrium

• 8 market surplus 'ill pressure price to )odo'n. $hen price )oes do'n quantitydemanded )oes up and quantity supplied

)oes do'n.• 8 market shorta)e 'ill pressure price to )oup. $hen price )oes up quantity demanded)oes do'n and quantity supplied )oes up.

• 7urin) disequilibrium price 'ill either )o upor )o do'n until it reach the equilibriumprice


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Shift in the Supply and 7emand-ur(e

• Shift in the demand cur(e brou)ht by demandshifters

• Shift in the supply cur(e brou)ht by supply shifters

Elasticity• 0n economics 'e use the concept of

elasticity to measure the sensiti(ity orresponsi(eness on one (ariable toanother.


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Price Elasticity of 7emand

• Measures the sensiti(ity of thequantity demanded to price.

•

Percenta)e chan)e in the quantitydemanded brou)ht about by a #percent chan)e in price.

• EQP = 9 chan)e in quantitydemanded

9 chan)e in pricer


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Price Elasticity of 7emand

• ;or e1ample suppose that the price of a)ood is P#" the quantity demanded is 5"units. $hen the price increases to P#+

the quantity demanded decreases to 35units. ;ind the price elasticity of demand.

•Price Elasticity of 7emand is al'aysne)ati(e re


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Price Elasticity of 7emandValue Classifcation Meaning

" Perfectly inelasticdemand

Quantity demanded iscompletely insensiti(e to price.

et'een" and 6#

0nelastic demand Quantity demanded isrelati(ely insensiti(e to price.

6# >nitary elastic demand Percenta)e increase in quantitydemanded is equal topercenta)e decrease in price.

et'een6# and6

Elastic demand Quantity demanded isrelati(ely sensiti(e to price

6 Perfectly elastic demand 8ny increase in price results inquantity demanded decreasin)to zero and any decrease inprice results in quantitydemanded increasin) toin?nity

8

8


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E1ample

• Suppose the price of potato is P#5and the quantity demanded is #""pcs. $hen the price increases to P+"quantity demanded is #5". $hat isthe price elasticity of demand*


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Perfectly inelastic demandcur(e

dprice

quantity

p

qd"

@Ed @="


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E1ample of perfectly inelasticdemand*

• $hat kind of )ood 'ill the demandstay constant 'hether price )oes upor do'n*

• 0nsulinAdiabetics cannot buy lesse(en if price )oes up and if 0 'alkinto the pharmacy and see there is a

sale on insulin as a non6diabetic 0don/t buy anyB


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0nelastic demand cur(e

d

price

quantity

p

"

@Ed @= bet'een " and 6#


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>nitary Elastic 7emand-ur(e

q

d

p

"

@Ed @= 6#


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Elastic demand cur(e

d

price

quantity

p

"

@Ed @= bet'een 6# and 6 8


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Perfectly elastic demandcur(e

d

price

quantity

p

"

@Ed @= 6 8


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Ce(enue and Elasticity

• $ith an inelastic demand cur(e anincrease in price leads to a decrease

in quantity proportionately smaller. Dhus total re(enue increases.

;i D l C -h $h P i


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;i)ure o' Dotal Ce(enue -han)es $hen Price-han)es: 0nelastic 7emand

Copyright©2003 Southwestern/Thomson Learning

Demand

Quantity0

Price

Revenue = $100

Quantity0

Price

Revenue = $240

Demand$1

100

$3

80

An Increase in price from ! to 3 "

" #ea$s to an Increase intota# re%enue from !00 to2&0


21/30

Ce(enue and Elasticity

• $ith an elastic demand cur(e anincrease in price leads to a decrease

in quantity proportionately lar)er. Dhus total re(enue decreases.

;i 3 D t l C -h $h P i


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;i)ure 3 o' Dotal Ce(enue -han)es $hen Price-han)es: Elastic 7emand

Copyright©2003 Southwestern/Thomson Learning

Demand

Quantity0

Price

Revenue = $200

$4

50

Demand

Quantity0

Price

Revenue = $100

$5

20

An Increase in price from & to ' "

" #ea$s to an $ecrease intota# re%enue from 200 to!00


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0ncome Elasticity of 7emand

• 0ncome Elasticity of 7emand refers tothe sensiti(ity of the quantitydemanded for a certain product inresponse to a chan)e in consumerincome.

• 0E7 = 9chan)e in quantitydemanded di(ided by 9 chan)e inincome.


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E1ample• Suppose 'ith an income of P3""" per month you are

consumin) #5" pcs. of ice cream. $hen your income'as increased to P,""" per month you are no'consumin) #F" pcs of ice cream. -eteris paribus 'hat

is your income elasticity of demand*

• Suppose 'ith an income of P+""" per month youare consumin) #"" pcs. of cloudG. $hen yourincome 'as increased to P5""" per month youare no' consumin) ," pcs of cloudG. -eterisparibus 'hat is your income elasticity of demand*


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-ross6Price Elasticity of7emand

• -ross6price elasticity of demandmeasures the responsi(eness of thequantity demanded for a )ood to achan)e in the price of another )oodceteris paribus.

• -PEo7 = 9 chan)e in quantitydemanded for )ood H di(ided by 9chan)e in price for )ood I


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E1ample

• Suppose the quantity demanded for )ood His #"" 'hen the price of )ood I is P+" and'hen the price of )ood I is P" quantity

demanded for )ood H is #5". -eteris paribus'hat is the cross6price elasticity of demand*• Suppose the quantity demanded for )ood H

is #5" 'hen the price of )ood I is P+" and

'hen the price of )ood I is P" quantitydemanded for )ood H is #"". -eteris paribus'hat is the cross6price elasticity of demand*


27/30

Price Elasticity of Supply• Price elasticity of supply sho's the responsi(eness of the

quantity supplied of a )ood or ser(ice to a chan)e in its price.

• EoS = 9 chan)e in quantity supplied di(ided by 9 chan)e in

price

• Suppose 'ith a price of P" a seller is 'illin)

to supply 5"" pcs of roses and 'ith a price ofP35 a seller is 'illin) to supply #""" pcs ofroses. $hat is the price elasticity of supply*

E1ample


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o' to Make Iour 'n 7emand andSupply Equation

• Suppose you are )i(en the follo'in)data:

• P4 = #"• Q4 = #""• Eo7 = 6#.+5• EoS = ".F

• $hat is Qd and Qs if price increases to#5*


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Steps in Makin) your 7emand andSupply Equation

• $rite the )eneral form of your 7emandand Supply equation.

• >sin) your demand equation diJerentiate

Q 'ith respect to P.• Multiply both sides 'ith PKQ.• Sol(e for the Lalue of b.•

Sol(e for the (alue of a.• $rite your demand equation.• Dhe same applies for your supply equation.


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E1ample

• i(en the data belo' make yourdemand and supply equation.

• P4 = 5""• Q4 = #"""• Eo7 = 6#.5•

EoS = ".5

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Market Equilibrium and Elasticity