Download Q - Piazza

Economics 001
Principles of Microeconomics
Professor Arik Levinson
•Lecture 6
– Elasticity
– Price elasticity of Demand
– Income elasticity
– Cross-price elasticity
#
1
DN: Revenue = Price x Quantity
Revenue change depends on
"steepness" of demand curve
2
Demand curve shallow
S
P
P1
P2
SBGH
D
Q1
P2Q2>P1Q1
farmers favor
BGH
Q2
Milk
Demand curve steep
S
P
SBGH
P1
P2Q2<P1Q1
P2
D
Q1 Q2
farmers oppose
BGH
Milk
3
The graphs below plot demand curves for
1. the miracle cure for a fatal illness
2. Pizza Hut sausage pizza
P
P
B
A
Q
Q
Which curve corresponds to the pizza?
A. A
B. B
DN: Price elasticity of demand
%QD
D 
%PD
4
5
Arc Elasticity of Demand
Q2  Q1
ηD
1
(Q1  Q2 )
ΔQ P1  P2
  2
 

P2  P1
ΔP Q1  Q2
1
(P1  P2 )
2
DN: Demand is price elastic if
ηD>1
DN: Demand is price inelastic if ηD<1
6
Figure 5-2 A Straight-Line Demand Curve
P
D 
3.90
3.70
1000
1000  19
 0.20
3.80
D 
1.10
1000
15000  1
3
 0.20
1
0.90
D
500
1500
14500 15500
Q
DN: Income elasticity of demand
Y 
%QD
%Y
7
DN: Cross-price elasticity
 AB 
%QA
%PB
Moving from point A to point B,
right and down the (straight line)
demand curve shown on the right,
the price elasticity of demand...
P
A
B
a)
b)
c)
d)
increases.
decreases.
remains constant.
cannot be discerned from
the information given.
D
Q
8
Moving from point A to point B,
right and down the (curved)
demand curve shown on the right,
the price elasticity of demand...
P
BA
B
A
D
a)
b)
c)
d)
increases.
decreases.
remains constant.
cannot be discerned from
the information given.
Q
9