EECS 1530 Lecture Notes - Lecture 5: Eurozone
21 Jun 2018
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EECS 1530 Lecture 5 Notes
Introduction
Substitute products
The U.S. demand for this tennis racket is price-elastic (sensitive to price changes)
because there are substitute products available
Hence U.S. consumers can purchase the Accel tennis racket for $120 (100 euros $1.20
per euro), which is now a lower price than that charged for the U.S. Malibu racket.
In this month, Accel sold 5,000 rackets.
The increase in demand for Accel rackets led to reduced demand for tennis rackets
produced by Malibu Co.
The two exchange rates used in the preceding example are very real.
The euro was valued at about $1.60 in July 2009 and was valued at about $1.20 (a
reduction of 25 percent) in June 2010, just 11 months later.
By April 2011 the euro had reached a high of $1.48, which amounted to a 23 percent
increase over 9 months.
But then, in July 2012, the euro reached a low of $1.24
This represented a 16 percent decrease over a period of 15 months.
This example illustrates, first of all, how much the price of a product can change in a
short time in response to movements in the exchange rate.
Second, it illustrates how the demand for an exported product can shift as a result of a
change in the exchange rate.
Third, the example shows how the demand for products of competitors to an exported
product can change as a function of the exchange rate.
This example considered only a single product.
The economic effects are much greater when one considers how the U.S. demand for all
products imported from eurozone countries could change in response to such a large
change in the euro’s value.
The following example helps explain the exchange rate’s effect on U.S. exports.
Document Summary
The u. s. demand for this tennis racket is price-elastic (sensitive to price changes) because there are substitute products available. Hence u. s. consumers can purchase the accel tennis racket for (100 euros . 20 per euro), which is now a lower price than that charged for the u. s. malibu racket. The economic effects are much greater when one considers how the u. s. demand for all products imported from eurozone countries could change in response to such a large change in the euro"s value. The following example helps explain the exchange rate"s effect on u. s. exports. Malibu co. produces tennis rackets in the united states and sells some of them to. This is now a lower price than that charged for the u. s. malibu racket. The increase in demand for accel rackets led to reduced demand for tennis rackets produced by malibu co. The two exchange rates used in the preceding example are very real.
