DMAC 207 Econ2302 Ch5

this is chapter five in microeconomics elasticity and its application and we’re
not going to take a look at supply and demand in more detail with going beyond
just eat equilibrium and looking at equilibrium when there’s a double shift
we’re just going to look at how buyers and sellers can will respond to changes
in market conditions in responses to price Andres Pais responds to income
related Goods so we’ve done this already we’re just going to take it to to
another level look a little bit deeper okay here’s the definition of the price
elasticity of demand sorry about that let me go back over here elasticity
allows us to analyze to find a man with greater precision we’re going to be
looking at buyers and sellers and how they respond to changes in market
conditions okay and here’s the definition again
basically we’re looking at how responsive how responsive buyers are to
changes in price and we can measure it in terms of a
percentage change so we can actually collect data so if you’re the manager of
Old Navy for example and you’re thinking of maybe charging a little bit more for
those t-shirts well before you actually end up with a shortage or surplus maybe
you can take a look at some actual data of what has happened before when when
we’ve raised you so you can take a look at the percentage change and press and
we’ve tried to raise prices before and what happened to sales and calculate
actually calculate what’s going on and measure consumers or buyers
responsiveness to changes in price and I asked you to add in that percentage
change formula to the top of your shirt or maybe in chemistry when you work so let’s say that you’re used to going
out to dinner a favorite freshman and you’re used to beat my pants and Becks
clear your name so we’ll call this the old price and we’ll call this the new
price all of a sudden you know you go away for the summer and you come back
and the same meal now cost twenty dollars
I know these are really easy numbers but in order to figure out a person has
changed this is new – old so that’s 20 minus 10 divided by the old and what’s
that equal 10 over 10 is 1 times 100 – that’s a hundred percent market that’s
how you use this percentage change form and that’s an example from when prices
increased let’s pretend that you’ve been at Dillard’s and you see the stupid shoe
hook you know got your eye on and hundred-odd
your daughter’s but back in a couple weeks and it is on setup so let’s figure
out the percentage change the numbers gonna be 15 divided by the old number is
how to join so what is that 50 ever hundreds to me what happened for 50% so you might see all around
dealers 50% off sale advertising this price change so that’s what we’re doing
this that’s how you use that formula to figure out the percentage change okay so again elasticity it’s a fancy
word of it it just means responsiveness to price are you going to keep buying
that product or not do you care about if it’s more expensive or cheaper and this
is just a way to measure it okay determinant is just a fancy word
for things that affect or will change our elasticity of a product okay the
first one is the availability of close substitutes if we’re talking about bottled water for example I’ve gotta
Niagara up here she can get from h-e-b what are some other four I see several
brands what are some other brands of water yeah bottle are you can think up
okay Daejeon blue aquafina smart water would you water
okay so we’ve got what what does this mean if Niagara decides to sell $5 per
bottle of water I can easily say I can easily respond to that right and say
that’s way too expensive I can easily buy I can respond to that
increase in price and so my demand for Niagara water is very elastic it’s very
flexible I can respond I can switch I have the choice to find a substitute
product for my so are there substitutes for that
product now if I had a heart condition and had a medicine one kind of medicine
and there was an engineering brand for that then am I going to be as flexible
to prices so you also see the difference what we’re talking about here I’m not
going to be able to be as elastic as responsive to changes in price okay
necessities versus luxuries all right so cruise ships
I keep hearing in the news about these terrible things that happen to people
that go on cruises it looks really fun and my friends sometimes go but then I
hear about getting stuck with with no plumbing and things like that so luxury
items we don’t have to go on a cruise to take a vacation right we could take a
road trip we could stay at home so a luxury item like a god you don’t have to
buy that so if those things get super expensive you could decide to not go
right you can be responsive to prices now do you have to have gas to get to
school and get to work all right so in that case we can’t be as
responsive to price that’s what the second one is talking about definition
of the market the more narrow your definition of the market the more
elastic the demand and this kind of goes back it’s related to the first one but
if we’re talking about coke coca-cola okay that’s dr. pepper right order you
could switch to something else water if we’re talking about soft drinks okay
that takes into account all of those tricks that we were talking about and
then you know then maybe water or maybe a sports drink now if we widen the
definition of the market even more and said food and beverages are there many
substitutes for food and beverages earth that whole category if we didn’t have
food and we didn’t um drink what else would we have what else could you switch
to you know what we’re talking about here so a particular product if you
define the market very narrowly so we’re talking about one particular product
like coca-cola then the demand would be more elastic but if we’re talking about
food in general as a food category and to find the market very broadly then
your elasticity of demand will be lower and then also time horizon we mentioned
that we do need gas you know whatever the prices we need a gas to get to what
are some other things that people are going to use as transportation transportation paint maybe hybrid cars
solar power or battery-powered if you give people enough time and you give
card companies enough time to think about alternative modes of
transportation then we can see over time that our demand for gasoline for example
might be less that might be more and more elastic okay so all of these things
play a role in our elasticity or our responsiveness to presence right so
demand tends to be more elastic that means we’re more flexible more
responsive more able to say no I’m not willing to pay that if we’ve got
substitutes if it’s a luxury item if we’re talking about a narrow definition
market and if we have more time to respond all right so basically that’s what
elasticity is our responsiveness to changes in price here is how we
calculate it the percentage change I just showed you some examples with your
your meal at your favorite restaurant or soon at Dillards on how to calculate the
actual percentage change but we’re going to need to do it twice in the numerator
part we’re doing it for quantity demanded and then in the denominator
part we’re doing it for price so basically we’re looking at how much our
sales going to change in relation to how much the price change and that gives us
some measure of the price elasticity of demand remember with this first formula
you don’t have to worry about a negative sign your you don’t have to worry about
the sign of the of your product that you get when you use the formula you’ll just
take an absolute guy okay money formula for you and I would
I’m going to provide this sheet on the test and all hi and this person is
change from you know at the top actually I wasn’t you think of person has change
as the new – the old and they did it backwards here in the book because they
were just trying to avoid that negative slide but you’re gonna get the same
answer but it doesn’t matter with the price unless the two of you man these
next formulas that we’re going to talk about the sign does matter a lot but on
this one that’s why they have a switch I would have 8 minus 10 here so they did
it they did the new and the old here so untucked we’re looking at a person’s
change of quantity demanded person is changing and that’s one example of how you you
know use that formula twice up here and down here and then you you calculate it okay there will be one question on the
test what you’re actually gonna have to calculate it out using these these
numbers they’re gonna start about this slide on the test so we we need to
retain how do we need to retain each formula how they’re laid out um the back
page of your test will be this this formula sheet now so I’ll provide that
for you and your quiz next time you’ll have those four clips okay so I said if I have a heart
condition and how to take this particular medicine you’re gonna have to
pay the price I’ve got medicine no matter what it is right it’s a life and
death type of thing and so when you’re not
able to change as much with the quantity of medicine that you buy doesn’t change
to the pricier medicine changes a lot we call that in the elastic demand in a
Lexington man and the price elasticity of demand is going to be less than one
again if you look at your formula shoot does that make sense I mean you’ve got a
fraction that’s less than one like a half a third that means the numerators
bigger than then I’m sorry the denominator to the numerator so there’s
a big change in price and people aren’t responding that much you still have to
buy the same amount now you just look at it mathematically price elasticity
between us give me the less than one the price changes quite a bit so this is
going to be a big change and this things about the same or there’s a
little change my brother said that he was in the middle of taking a math test
one time and his friend came up to his teacher really important my brother said
you know they were worried about me because he just thought up and left and
then he trusts you Randall’s and Kroger and every special
about my feeling well that was really angry I never met him but because he
would have been in trouble but whatever the price is he would have paid it right
we’re talking about so there’s big change in price they could have charged
under 100 bucks for that battery but he still needed one and so if you just look
at the formula there’s big change in price and not that much change the
quantity donated going to have a fraction where the
denominator is bigger in the numerator so this whole thing is you need less
than one and that’s what we mean by inelastic demand elastic demand ok used
to think of something worried that you can respond to changes in so movie
tickets first thing I know if you use your ID you can get in for five bucks
there but what if they got rid of that rule
what if they started charging twenty bucks to go to the movies how many
people would still go oh say a lot of hands what are some things that y’all be
doing said go to the dog theater to that place breadbox right you would respond
your demand for movie tickets at the movie here would be theory what we call
elastic and so now the press list lets us you have demands to be greater than
one let’s think about that in terms of our formula for do there’s a change in
price tickets go up by ten percent and college students and everybody s it had
way too expensive I’m not going and so all of y’all decide to change and do
something else watch movies that come under here that you can see that the
whole thing the numerator should be bigger than the denominator than the
whole thing so that’s what this slide is saying just
mathematically it’ll be greater than one tape so remember that we have these
special cases where it will look at some graphs next but we have those special
cases where it’s a man for product is perfectly inelastic
that means the quantity demand doesn’t changed at all and so you might think of
maybe somebody’s heart medicine or insulin medicine they absolutely have to
have no matter what the price has changed we can have relatively inelastic
but this is one extreme another extreme is perfectly elastic that means there’s
only one price that people are willing and able to pay for that particular
product if it goes up by one cent then there that seller is going to be out of
luck people are going to switch to something else in this column the second
one perfectly elastic in the unit elastic is one other theoretical outcome
where the quantity demanded just happens the change happens to be exactly the
same as the percentage change in price it could happen
okay so nice changes in customer does not respond that me says something that
they have to have that would be the first one perfectly any less nearby in
any ways and this is what that looks like so if you have to have a hundred
doses of your you know insulin like my brother’s friend no matter what the
price the pharmaceutical company could charge four dollars for a dose five
dollars per dose hundred dollars for a dose if it’s something that his life
depends on Silby my hundred doses per month all
right so this is you can remember this we usually demand is downward slip into
the right but in this case for a particular product that you absolutely
have to have no matter what the price inelastic demand remember is straight up
and down and just graphically it represents you have to have this product
no matter what the pharmaceutical company charges you so you can remember
it starts with an i inelastic straight up and down like an i all right out to your notes here I would
call this relatively inelastic it’s pretty steep it’s almost an ayah but not
exactly usually our demand curve is downward-sloping to the right like this
but you can see this one’s you know getting closer and closer to and I so
this is relatively inelastic and we have different degrees just based on on the
data that we have in terms of 22-minute and price for an end product so the
steeper that it gets the closer and closer it gets to that straight up and
down vertical line it’s getting more and more inelastic here’s unit elastic where it’s just a
change it’s gonna be the same about the numerator and denominator you skip this
slide hey you see more elastic demand the demand curve is fatter
that’s over you sustained in chapter 4 last time where there is some change now
what if we have perfectly us so on this on this slide just relatively elastic
relatively elastic demand okay here another extreme this is perfectly
elastic to man perfectly elastic so if you ever see that on a quiz or test just
remember that’s a straight horizontal line and what does this mean
y’all mentioned so many substitutes for an aggravator
right there’s so many different kinds of bottled water that we’re used to paying
about a dollar for this right so let’s pretend a cigar
well if ball of water company knows that the market clearing price is about a
dollar why would they sell for 50 cents they’re gonna sell it for a dollar
because that’s what everyone else is selling it for if they tried to charge
two dollars for it what’s going to happen to their sales and people are
going to find a different their new switch over to this line right or a
different branch but this is the demand for a particular you can think of
bottled water in this case there is no demand when the price goes up they can
try to charge five bucks for bottled water or 10 bucks for valve water but
there’s no demand there because there are so many substitutes and customers
can easily respond and switch to another company that there’s only demand at one
price that’s what this gravity’s so when we’re thinking the less velocity
relative economics it refers primarily to work in reference to how the price
response form now have the quantity to meted response to premises a reason good
shape so far these graphs okay we can also look at it we can calculate it
elasticity we can graph it and we can also use something called the total
revenue test to describe elasticity hey this is the first printed formula on
your formula sheet which will be provided to you total revenue is the
price of the product times quantity and we’re not talking about profit yet we’ll
get to that when we’re subtracting out costs but this is revenue how much money
you made I’m just price times quantity this is going to be different when the
demand for product is either elastic or inelastic it’s going to to change
alright let’s take a look at any elastic to me all right it says with any last six
minutes that means something is to think of my brother’s friend insolent with
inelastic demand an increase in price leads to a decrease in quantity those
personally smart although with medicine it would be perfectly inelastic you mean
it’s not going to change at all so total revenue increases if it’s
something that people have to buy no matter what the price the pharmaceutical
company increases the price what’s going to happen to tell the right name they’ll
be able to make more money because people still have to buy that product
and so you know just looking at your formula if this increases price
increases and quantities sitting the same of course total revenue is going to
increase so point where it increases when you raise the price of products you
know that the demand is being inelastic and that’s what this side is saying actually let’s go back here what if the
price decreases what’s gonna happen a total revenue if the product is
inelastic people have to have it what’s going to happen until the revenue it
will decrease yeah so they’d be able to think about it both ways if the demand
for product is inelastic like medicine you have to have it if it gets more
expensive and quantity stays about the same total revenue will increase and
then the opposite will happen quantity stays about the same and the price
decreases total revenue will decrease so with elasticity an increasing price that leads to a
decrease in quantity mantid will cause total revenue to decrease so we’re talking about listen think
about maybe tickets again so if they raised the price of movie tickets and it
might not be that much but it’s enough for us to say you know we’re going to
stay at home we’re gonna watch Netflix tonight we’re not going to pay for for
movie tickets and a lot of people do that if the quantity and their sales
start to go down because a lot of people decide to use a breadbox or Netflix
instead just a little drop in price can lead to a little rise in price overall the bottom s respond and that’s what a lot of us respond and say hey let’s go
see movies were often we’ve got a big area here representing a lot of us being
responsive than was the total earnings increase so it just
depends on yeah if the demand is inelastic or elastic it’s because MCC usually gets a certain
amount of money from the state and we’ve heard about deficits in the news you
know but that’s happening nationwide at the state level too and so MCC is
getting less and less funding from the state than we did in prior years and so
to make up for that shortfall in tuition and my committee are jobless examine
different sources of revenue resize tuition and I presented to the
administration the President and vice-presidents the concept of any
elasticity I said you all are assuming that demand for MCC tuition is inelastic
you’re assuming that total revenue is going to increase that the quantity of
students who are going to be taking hours here it’s gonna stay the same so
that when we increase from increased tuition we’ll be able to make up for the
shortfall of the lack of state funding and I said we’ve got to be looking at
well today we’ve got to be looking at other you know nearby colleges and their
tuition too because you know MCC is a great place but you know if the price is
hot enough you can’t just assume that students are going to be yeah coming no
matter what the price here and so how the discussion about this very thing in
front of that that group thank you however fuck Forks well well
you’re welcome it’s just you know it’s very it seems really technical here but
it’s very applicable to a lot of different situations okay okay figure four let’s talk about this
one even with one demand curve there are certain parts of it we’ve been talking
about different products in our you know demand for it being inelastic or
elasticity or elastic or inelastic but even among one along one demand
curve there are parts of it that could be more elastic or inelastic than others how many of you all have to have coffee
in the morning like you’re just a devoted Starbucks drinker okay mustnĀ“t
and Dan alright so if your Starbucks coffee let’s pretend that it was you
know three bucks for your coffee okay which I’ll still buy it if it was if
they change the price to 350 no Boston no crank what about three oh three so
three cents is enough for you to change so if you’re used to paying three
dollars okay yeah okay you still pay and still be ok with you Austin how much
would it change for you for you to say no more I’m not willing to pay past 325
so about three you’re able to pay more than that okay that’s what this looks
like a really complicated figure but that’s what this is saying that
Starbucks or any other company can charge a little bit more for their
product maybe one or two three in this case it’s dollars but we could be
talking about cents here and people would still pay for it demand is inelastic on this part of the
ground so if the price is just changing maybe one or two dollars people will
still want their Starbucks will still want this product they’re not mine they
don’t mind to pay a little bit more for that item that their their favorite item
so demand is inelastic here on this part of the graph but then once you start
charging like Austin said 25 more cents or five more dollars for a t-shirt or
seven more dollars for a t-shirt people start noticing and say to themselves I’m
not willing to pay that and so that’s what this figure is saying that there
are parts portions of a demand curve that are inelastic and then there are
portions that are elastic that top portion all right so everybody’s okay on the price
elasticity of demand okay let’s look at income elasticity of demand okay we’re
not talking about price anywhere we’re talking about income you’ll remember
from the quiz and from last time the two goods that deal with income are inferior
and normal goods okay that’s what we’re talking about
here inferior and normal Goods okay so the elasticity of demand we learned what
those are the definition of those before Justin applied to elasticity here okay
so we’re going to look at the person is change of quantity demanded and the
percentage change in income okay so here’s the formula for it let’s go back
to normal guys even if we even if I didn’t give you numbers let’s just think
about what would happen to this formula for a flat-screen TV brand name clothing
things that people usually buy more of when they have more money okay what’s
gonna happen to this formula people have more money the percentage change is
going to be positive or negative remember it’s new – hole so if there’s
an increase in your income 40,000 to 50,000 would you get a positive or
negative number there for the percentage change we don’t have to work it out a
positive number so this is gonna your denominators gonna be positive if you
have more money if you buy more sports cars
$50,000 if you buy more brand-name clothing remember the formula for person
has changes new minus old divided by old so if there’s an increase in the number
of brand-name clothing items that you’re buying this is going to be positive or
negative up here positive so the whole thing you think if I didn’t give you
numbers for it and add this into your notes the whole thing when you calculate
income elasticity for normal goods that’s going to be positive thing the
income elasticity of demand will be positive we could just reason through even
without numbers let me switch back over here to the one about something or nurse
she’s slightly right all right with an inferior bitter so these are like ramen
noodles so if you’ve got a increase in your income remember the formula for
percentage changes you do – old so this is a positive on the bottom but if
you’re consumption of Roman noodles goes from five packets a month down to one
packet of money this is your this is your new number we’re gonna for
artillery to be one minus five over five right and then get a negative number on
top so this would it make our whole thing negative let’s see what it’s you
know you have to put numbers in here these reasons we’re in terms of the sign
here percentage change is going down because you’re buying less of it like
we’ve defined with inferior goods you know that the income elasticity of
demand it’s going to be negative for inferior goods it’s going to be positive
then we’re talking about the sign and then here are some other examples
for things that people regard as necessities and luxuries I mentioned to you there’s just going to
be one problem on the test where you’re going to actually have to calculate the
price elasticity of demand I told you to start that one slide about the ice cream
these other questions about income elasticity by the true/false question
that income allows to see for normal goods is usually negative what would you
say false and you could just freeze them
through that with a definition and looking at the the corner line another
formula it’s the cross price elasticity of demand okay so let’s look at this
formula we’re looking at the quantity demanded the change percentage change in
quantity demanded for one product and the percentage change in the price of
another one okay with substitutes like Coke and Pepsi for example if the price
of coke increases this is going to be a positive number down here what’s going
to happen to the demand for Pepsi will increase so this whole thing is going to
be positive number this whole thing will be positive for complements like peanut
butter and jelly so peanut butter got more expensive this
is gonna be that will lead to the positive number down here in the bottom
what’s gonna happen to the demand for jelly decrease so the person has changed
for jelly is going to be positive number a negative number people are eating less
negative and that will make the whole thing negative
so I don’t have this in the notes but you might just add in for substitutes
the cross price elasticity of demand is positive and for compliments the cross price
elasticity of demand will be negative hey we can also talk about the
elasticity of supply the price elasticity of supply we’ve been talking
about demand up to this point consumers but we can also talk about the
elasticity of supply in terms of how responsive businesses and firms are to
changes in price of the product hey John number what perfectly inelastic
demand look like you could draw it in the air with your finger what’d it look
like perfectly inelastic straight up and down
right like an eye the same for perfectly inelastic supply okay you already know
inelastic means really inflexible or non-responsive what does this mean in
terms – in terms of paying business before with consumers it was something
that had to have now with a business what would make a business really
inflexible with the amount of product they’re able to offer thank you have a
stadium how many seats they have how many tickets they can sell its that’s it
that’s all all the things they have in that theater or you think of in the
short run with your apartment complex yeah they can add on later but as of
today this is how many units we have and it’s worth inelastic in that way no
matter what people are willing to pay for the post so just remember straight up and down
for either inelastic supply or inelastic demand if you see that on a test
earthquakes then we have just like demand we’ve got relatively inelastic is
pretty steep we’re gonna go pretty quickly through these next ones on D you can see that it’s getting
flatter and flatter and perfectly elastic supply looks just like perfectly
elastic demand and what does this mean that we can supply as much as we want at
this price you don’t think of it this is what type of business is able to produce
a whole bunch of stuff you’re not limited don’t think of an item that’s
really easily and you may make several copies of it easily software music CDs that’s pretty toys so if they mean that
sharing business here they’re able to make a bunch of copies or a bunch of
items at this price so that’s what an example of perfectly elastic would be okay so suppliers can either be elastic
or inelastic and there you know there are the extremes of perfectly inelastic
and perfectly elastic but they can be relatively either one as well but those
are some examples for the worst thing what to talk about and I’ll give you
your Gunners question all right the price elasticity of supply
here’s the formula for it it’s just like the price elasticity of demand formula
except that we’re talking about quantity supplied now but we were talking about
the total revenue test all right how would you describe this demand curve
relatively elastic are relatively inelastic just looking at the shape of
it relatively inelastic it’s pretty steep this we’re talking about food here
the demand for food your author argues is relatively inelastic few days and so
even if food was really super cheap over time afresh you know we’d hear some some
produce that our demand for that is relatively inelastic and there’s only so
much that we can’t eat and consume and then we’re going to want even if the
price is cheap so that’s what that means okay how would you describe this sucker relatively elastic or relatively
inelastic relatively inelastic as well and why is supply for wheat relatively
your honors is that har MERS they plant whole bunch and then when it’s time to
reap the crop it’s just going to depend on what they do a long time ago and it’s
not like they can keep printing out new books or burning new CDs they’re pretty
limited in terms of their sponsor prices it’s just the crop that they yield it
okay so there’s equilibrium like we’re used to looking at okay so we’re saying
that hundred items of wheat are the officials of we term a sold at three
dollars each when the demand and supply for a product like wheat are relatively
inelastic let’s see what happens when there’s a bumper crop and this year
there was a lot of rain and it was really plentiful in terms of the crop
yield so what’s that going to do to supply we have wonderful crop yield 70
to be shifted to the right okay there’s our new equilibrium okay now hold on one
second total revenue before the shift when we have just regular yields of you
know hundred we could bring hundred bushels two of wheat to the marketplace
what’s our total revenue there were suppressed homes quantity three hundred
so three times a hundred now this year we had a great bumper crop you’ll
already know from your homework that when supply shifts to the right our
equilibrium price decreases and equilibrium quantity increases but now
what’s total revenue to toity it actually hurts farmers to have a bumper
crop because of the relatively you know inelastic supply and demand for this
product if it was something that we could keep and people could hoard and
buy a bunch of it say for later then that would be different but in this case
with a perishable item like wheat you know we see that the eel and the
relative of elasticity of supply and demand can you know effect in this case
farmers and it can affect a business’s total revenue and I will go ahead and stop right there
so that’s the end of chapter 5

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