Market Equilibrium and Elasticity

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    Market Equilibrium and

    Elasticity

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    Short Quiz Suppose 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 P5* 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 mobile cellphone %#pt&.

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

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    Short Quiz Suppose 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 Philippines per 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 P5* Make a supply schedule %,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 the ta1& %#pt&.

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

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    Market Equilibrium

    • Market equilibrium: quantity demanded equals quantity supplied

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

    • Equilibrium Quantity %q4& is quantity correspondin) to equilibrium price

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    Market Equilibrium

    • i(en the demand and supply equations ho' do you compute for the equilibrium price*

    • Qd = 65 2 .5P •

    Qs = #" ! #.5P

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    Market 7isequilibrium

    • $hen price is set abo(e or belo' the equilibrium price there 'ill be a surplus or shorta)e of )oods.

    • E1cess Supply %Market Surplus& ! a situation 'here quantity supplied e1ceeds quantity demanded.

    • E1cess 7emand %Market Shorta)e& ! a situation 'here quantity demanded e1ceeds quantity supplied.

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    Market 7isequilibrium

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

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

    • 7urin) disequilibrium price 'ill either )o up or )o do'n until it reach the equilibrium price

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    Shift in the Supply and 7emand -ur(e

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

    • 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 or responsi(eness on one (ariable to another.

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    Price Elasticity of 7emand

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

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

    • EQP = 9 chan)e in quantity demanded

      9 chan)e in price r

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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 7emand Value Classifcation Meaning

    " Perfectly inelastic demand

    Quantity demanded is completely insensiti(e to price.

    et'een " and 6#

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

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

    et'een 6# and6

    Elastic demand Quantity demanded is relati(ely sensiti(e to price

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

     8        

     8        

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    E1ample

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

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     Perfectly inelastic demand cur(e

    d price

    quantity

    p

    qd"

    @Ed @= "

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    E1ample of perfectly inelastic demand*

    • $hat kind of )ood 'ill the demand stay constant 'hether price )oes up or do'n*

    • 0nsulinAdiabetics cannot buy less e(en if price )oes up and if 0 'alk into the pharmacy and see there is a

    sale on insulin as a non6diabetic 0 don/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 demand cur(e

    d

    price

    quantity

    p

    "

    @Ed @= 6  8        

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    Ce(enue and Elasticity

    • $ith an inelastic demand cur(e an increase 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 in tota# re%enue from !00 to 2&0

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    Ce(enue and Elasticity

    • $ith an elastic demand cur(e an increase 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 in tota# re%enue from 200 to !00

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    0ncome Elasticity of 7emand

    • 0ncome Elasticity of 7emand refers to the sensiti(ity of the quantity demanded for a certain product in response to a chan)e in consumer income.

    • 0E7 = 9chan)e in quantity demanded di(ided by 9 chan)e in income.

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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 you are consumin) #"" pcs. of cloudG. $hen your income 'as increased to P5""" per month you are no'