MGEA02H3 Lecture Notes - Lecture 5: Demand Curve, Key 2, Economic Surplus

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amberant375

12 May 2018

School

UTSC

Department

Economics for Management Studies

Course

MGEA02H3

Professor

John Parkinson

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Topic 4 – Elasticity, Tax Incidence and

Tax Burden

A key characteristic of demand and supply

curves! – Elasticity

Elasticity = sensitivity OR responsiveness

Changes in one variable as another variable

changes

How sensitive is the quantity demanded to

changes in the price of the product?

Answer is given by the elasticity of demand.

How sensitive is the quantity of tomatoes

supplied by businesses to changes in the

price of tomatoes in Ontario? Answer is

given by the elasticity of supply of tomatoes

in Ontario.

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Elasticity of Demand

ED = (dQd/dP) x (P/Qd)

ED = percentage change in quantity demanded

percentage change in price

= percentage change in quantity demanded

“per” percentage change in (own) price

….how consumers respond to a change in

market price (as we move ALONG the demand

curve)

Called the Own Price Elasticity of Demand

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MGEA02H3 Full Course Notes

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Document Summary

A key characteristic of demand and supply curves! Changes in one variable as another variable changes. Answer is given by the elasticity of demand. Answer is given by the elasticity of supply of tomatoes in ontario. Ed = percentage change in quantity demanded percentage change in price. how consumers respond to a change in market price (as we move along the demand curve) Es = percentage change in quantity supplied percentage change in price. How producers respond to a change in market price (as we move along the supply curve) It means that if p = and the price changes by 4%, we expect that the quantity demanded will change by about 1%. (why about ?) Thinking about different goods, some have more elastic demands; others have less elastic demands. Demand is unit(ary) elastic if ed = 1. Elasticity is different at every different point along a linear demand curve. See it on a graph (when demand is elastic):

Related Questions

Match the following terms with their proper definitions.

Potential Matches:

1 : measures the responsiveness of the quantity supplied of a good to changes in the price of that good

2 : a formula that measures the responsiveness along a specific section (arc) of a supply or demand curve and measures the "average" price elasticity between two points on the curve.

3 : measures the responsiveness of the quantity supplied of a good to changes in the price of the related good

Answer

: Own-Price Elasticity of Supply

: Cross-Price Elasticity of Supply

: Arc Elasticity

The following table shows price elasticity of demand for several produce items. Apples price elasticity = | -1.05 | = 1.05 Strawberries price elasticity = | -0.50 | = 0.50 Lettuce price elasticity = | -0.15 | = 0.15 Tomatoes price elasticity = | -0.11 | = 0.11

Question 1: Elastic and Inelastic Demand

Which product above has the most price-elastic demand and would therefore show the greatest increase in quantity demanded if the price were lowered?

Question 2: Total Revenues to the Supplier

For which product(s) would a 1% drop in price cause a decrease is total revenues for the farmers who grow and sell it, if their revenues were not subsidized as the quantity demanded increases? List all of them.

Question 3: Calculating elasticity

Corn is presently $4.00 per bushel. If we reduce the price by 2%, to $3.92 per bushel, we observe that the quantity demanded increases by 1.3%. What is the price elasticity of demand for corn? (Convert the percentages to decimals before computing to avoid confusion interpreting the answer, and express the answer as an absolute value, that is, as a positive number.)

1. Elasticity shows the responsiveness of supply or demand to changes in price. What are the factors exerting influence on price elasticities of supply and demand?

2.Would you consider your demand for gas to be relatively elastic or

3. What are the key determinants of the price elasticity of demand for a product? Which determinant is the most important?

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MGEA02H3 Lecture Notes - Lecture 5: Demand Curve, Key 2, Economic Surplus

MGEA02H3 Full Course Notes

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