Economics: Markets and Market Failure

Transcription

1 Economics: Markets and Market Failure Elasticity

2 Objectives Students will understand The meaning of elasticity; The meaning of price elasticity; The meaning of income elasticity; ; The meaning of cross elasticity; How to calculate elasticity

3 Starter questions Answer the following: -0.5 is price elastic/inelastic/unit elastic? -1.5 is price elastic/inelastic/unit elastic? +2 is what in terms of price elasticity Ped is. Yed is.. The formula for Ped is The formula for Yed is The price rose 10% quantity demanded fell 20% How elastic is this? What is the figure? What is an inferior good? What sign would an inferior good have in a Yed calculation?

4 Elasticity Elasticity is the responsiveness of quantity to another factor Price elasticity of demand is the responsiveness of demand to price Income elasticity of demand is the responsiveness of demand to income Cross elasticity of demand is the responsiveness of demand for one good to the price of a substitute or complement.

5 5 areas of elasticity - perfectly elastic -1> - elastic -1 unitary elastic 0>-1 inelastic 0 perfectly inelastic For price elasticity it is always negative so economists often ignore the sign (you may not write + however) For income elasticity and cross elasticity the sign is important. Ped - always Yed + = normal good - = inferior good Xed + = substitute -= complement

6 Price elasticity of demand Exercises (Calculate the ped): Price falls from 2.00 to 1.00 and qd pp rises from 100 to 150 Price rises from 100 to 120 and qd pp drops from 200 to 180 Price rises from 30p to 36p and qd pp drops from to Price rises from 60p to 66p and qd pp drops from to 50000

7 Group task In a group of 3 to 4 prepare a short presentation explaining Price elasticity of demand. Groups are named 1..2 from the teachers machine down, back up to the front, back down to the back and finally back up to the door. (15 mins) We will choose 2 groups at random to make their presentations. (5 mins each).

8 Income Elasticity of Demand Watch this introductory video by Phil Holden on the Income elasticity of demand:

9 Income Elasticity of Demand What will be the change of demand for a good given our income (nb Y is a PASTEY factor). Formula: Yed=Y/qd * qd/ Y Yed = % qd/ % Y

10 Income Elasticity of Demand Revising definitions from last week: Normal good: If income goes up demand goes?? Inferior good: If income goes up demand goes?? Unlike Ped, we need to look at Sign + Size + normal good - inferior good SIZE: 0-1-

11 Yed Yed = % QD/% P Income rises 10% Quantity rises 5% Yed=5%/10%=0.5 Normal good-inelastic Income rises 10% Quantity rises 50% Yed=50%/10%= 5 Normal good-elastic Income drop 10% Quantity rises 10% Yed=10%/-10%=-1 Inferior good: UNITARY ELASTIC

12 Yed exercises Exercises (Calculate the yed): Income falls by 10% and qd pp falls 50% Income rises by 10% and qd pp rises 5% Income falls by 50% and qd pp falls 50% Income rises by 50% and qd pp rises 5% Income falls by 50% and qd pp rises 50% Income rises by 10% and qd pp rises 100% Income rises by 10% and qd pp does not drop

13 Yed exercises Exercises (Calculate the yed): income falls from 20000pa to 18000pa and qd pp falls from to income rises from 100pw to 120pw and qd pp rises from 200 to 180 Income rises from 30p.h to 36p.h and qd pp drops from 200 to 180 Income rises from 60 to 66 and qd pp rises from to 50000

14 Cross Elasticity of Demand Xed is about substitute or complement goods. Demand is affected by the price of another good: How is qd for good a affected by change in price of good b Xed ( a >b )= % QD a /% P b As with Yed sign and size are both important + means goods are substitutes - Means goods are complements - The bigger the size the stronger the relationship

15 Cross Elasticity of Demand Cross elasticity of demand is the responsiveness of demand for one good to the price of a substitute or complement. +ve elasticity is a substitute good (as the price of a substitute drops demand for the substitute rises, and for original (competing) good drops) -ve relationship is a complement good (as the price of a complement drops demand for the complement rises, and for original good rises with it)

16 Cross Elasticity of Demand Watch this introductory video by Phil Holden on Cross elasticity of demand:

17 Xed Exercises (Calculate the Xed): Price b falls by 10% and qd pp a rises 50% Price b rises by 10% and qd pp a falls 5% Price b falls by 50% and qd pp a rises 50% Price b rises by 50% and qd pp a rises 5% Price b falls by 50% and qd pp a rises 50%

18 Xed exercises Exercises (Calculate the ped): Price b falls from 2.00 to 1.00 and qd pp a rises from 100 to 150 Price b rises from 100 to 120 and qd pp a drops from 200 to 180 Price b rises from 30p to 36p and qd pp a rises from to

19 Attempt this quiz Plenary quiz cw/content/index.html Attempt the quiz Elasticity quiz.doc