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aw o emanaw o eman

Law of DemandPeople do less of what they want to do as

the cost of doing it rises

Recall the Cost-Benefit PrinciplePursue an action if and only if its benefits

are at least as great as its costs

eca t e eservat on r ceThe highest price wed be willing to pay

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ota xpen tureota xpen ture

Total Expenditure equalsThe number of units sold multi lied b

the price of the good

=

The dollar amount that consumers spend

on a roduct is e ual to the dollar amount

that sellers receive

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The Law of Demand andThe Law of Demand andota xpen tureota xpen ture

Will consumers spend more on my productif I sell more units at a lower price or fewerun s a a g er pr ce

Depends upon price elasticity of demand

increase, decrease, or stay the same

This is due to the Law of DemandAs price rises, quantity demanded falls

As price falls, quantity demanded rises

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Fig. 5.7Fig. 5.7The Demand Curve for Movie TicketsThe Demand Curve for Movie Tickets

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Fi . 5.8Fi . 5.8The Demand Curve for Movie TicketsThe Demand Curve for Movie Tickets

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Fig. 5.10Fig. 5.10Total Expenditure as a Function of PriceTotal Expenditure as a Function of Price

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r ce ast c ty o emanr ce ast c ty o eman

total expenditures,

change when the price changes

the percentage change in the quantity

-change in its price

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r ce ast c ty o emanr ce ast c ty o eman

D

D

=PP %

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r ce ast c ty r ce ast c ty Elastic uantit chan es b a lot when

price changes even a littleprice elasticity is greater than one

price changes even a lot

price elasticity is less than oneUnit elastic quantity change = price changeprice elasticity equals one

,you will always get a negative- WHY?For convenience we will take the absolute value

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Fig. 5.11Fig. 5.11Elastic and Inelastic DemandElastic and Inelastic Demand

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Price Elasticity andPrice Elasticity and

For an elastic product

Quantity demanded is highly responsive

Percentage change in quantity dominates

n ncrease n pr ce w re uce o a expen ure

A decrease in price will increase total expenditure

Quantity demanded is not responsive

Percentage change in price dominates

An increase in price will increase totalexpenditure

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eterm nants o ast c tyeterm nants o ast c ty

Price elasticity of demand will be relatively high ifit is easy to substitute between products Why?

Budget share

The larger the share of the budget the good uses

Why?

Time

Because substitution takes time, price elasticitywill be higher in the long run than in the short

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xamp esxamp es

What are some goods that will havever elastic demand?

What are some goods that will have

very ne ast c eman

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a cu at ng r ce ast c ty a cu at ng r ce ast c ty

Proportion by which quantity demandedchanges divided by the proportion by which

price changes

Q

P

QQ1

%==

=

slope

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Fig. 5.12Fig. 5.12Graphical Interpretation of Price

Elasticity of DemandGraphical Interpretation of Price

Elasticity of Demand

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DemandDemand

Income Elasticity of DemandThe amount b which the uantit

demanded changes in response to a one-

percent change in incomePositive for normal goods

Negative for inferior goods

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