Download Equilibrium & Elasticity

Equilibrium & Elasticity
Macroeconomics
Unit One
Activity 7 & 8
by
Advanced Placement Economics Teacher Resource
Manual. National Council on Economic Education,
New York, N.Y.
Objectives
• Define equilibrium price and equilibrium quantity.
• Determine the equilibrium price and quantity when given
the demand for and supply of a good or commodity.
• Explain why, at prices above or below the equilibrium
price, market forces operate to move the price back
toward equilibrium price.
• Predict the equilibrium price and quantity if there are
changes in demand or supply.
• Given a change in supply or demand, explain which
curve shifted and why.
• Explain how markets act as rationing devices.
Objectives
• Define price elasticity of demand and
price elasticity of supply.
• Calculate price elasticity using the arc
method.
• Predict the effect on price and quantity
given demand curves with different
elasticities.
• Explain the difference between slope of a
line and the elasticity between two points
on a line.
Introduction
• This lesson will bring the two sides of the
market—demand and supply—together to
determine the equilibrium price and
quantity.
• You should understand that unless there
are forces operating to change supply or
demand, the price and quantity will remain
at the equilibrium.
Introduction
• Activity 7 brings the supply and demand sides of
the market together and helps the students
understand equilibrium price and quantity.
• The factors that shift supply and demand are
also used to emphasize the impact of supply or
demand on the equilibrium price and quantity.
• The second part of Activity 7 has you work
through changes in supply and demand and the
effects in related markets.
Introduction
• Activity 8 focuses on the definition of
elasticity and the calculation of the
coefficient of elasticity.
• The activity then has you see the
differences between elasticity of a curve
and the slope of a curve.
Equilibrium Quantity and Price
A.
What happens if the price is $10?
The quantity supplied is 100,
and the quantity demanded is 60.
Therefore, there is excess supply.
Equilibrium Quantity and Price
B.
What happens if the price is $6?
The quantity demanded is 100, and the quantity
supplied is 60. Therefore, there is excess demand.
Equilibrium Quantity and Price
C. What happens if the price is $8?
The quantity that producers want to sell is
exactly equal to the quantity that buyers want
to buy. The market is in equilibrium.
Activity 7
• Find one partner (not your close friend)!
• Complete Activity 7.
– You will be called upon to come to the board
and share your answers.
E1
E2
S1
S
D1
D
E
S1
S1
D1
D1
S1
D1
D1
D1
D1
D1
D1
D1
Activity 8
• In many economic situations, producers and
policy makers want to know more than simply
the direction in which price or quantity will move.
• The law of demand tells producers that if price
increases, the quantity demanded will decrease.
• This law of demand tells producers that if price
increases, the quantity demanded will decrease.
• This law doesn’t tell the producers by how much
the quantity demanded will decrease.
• The responsiveness of one variable to changes
in another variable is important information.
• Elasticity is a measurement of how much one
variable will change if another variable changes.
ELASTICITY
Demand elasticity is always negative and supply elasticity is always
positive.
For this reason, we look a the absolute value of the coefficient of elasticity
and always talk about positive values.
Because elasticity measures responsiveness, changes in the variables
are measured relative to some base or starting point.
Calculating the Arc Elasticity
If Ed > 1, demand is said to be “price elastic”.
If Ed < 1, demand is said to be “price inelastic”.
d
=
(90 – 80)
(90 + 80)/2
(0.117)
(10 – 8)
(10 + 8)/2
(0.222)
%  of Qd
%  of P
(0.545)
(110 – 80)
(110 – 80)/2
(10 – 8)
(10 + 8)/2
(0.015)
(0.222)
Remember, that elasticity and slope are different concepts!
The slope is 1 at both ends of the demand curve
Demand curve “D” is more inelastic.
What happens to the equilibrium price and quantity with an
elastic demand
inelastic
demand
curve,
curve,
if if
supply
supply
increases?
increases?
With an inelastic demand curve, the price effect is
With elastic demand curve, the price effect is smaller
greater and the quantity effect is smaller than with
and the quantity effect is larger than with an inelastic
the elastic demand curve.
demand curve.
Problem Involving Extra Credit
% change in number of Q’s
% change in extra cr. pts.
Activity 8: Elasticity – An Introduction
• Part A
– Now, suppose that your economics teacher
currently allows you to earn extra credit by
submitting answers to the end-of-the-chapter
questions in your textbook.
– The number of questions you’re willing to
submit depends on the amount of extra credit
for each question.
– How responsive you are to a change in the
extra-credit points the teacher gives can be
represented as an elasticity.
Write the formula for the elasticity of extra-credit
submitted:
εps =
Percentage change in number of questions
Percentage change in extra-credit points
2. Now, consider that your teacher’s goal is to get you
to submit twice as many questions:
a 100percent increase. Underline the correct answer in
parentheses.
(A) If the number of chapter-end questions you
submit is very responsive to a change in extracredit points, then a given increase in extra
credit elicits a large increase in questions
submitted. In this case, your teacher will need
to increase the extra-credit points by (more than
/ less than / exactly) 100 percent.
(B) If the number of chapter-end questions you
submit is not very responsive to a change in
extra-credit points, then a given increase in
extra credit elicits a small increase in questions
submitted. In this case, your teacher will need
to increase the extra-credit points by (more than
/ less than / exactly) 100 percent.
• Part D – Problem Involving Coffee
– Suppose Moonbucks, a national coffee-house
franchise, finally moves into the little town of
Middle-of-nowhere. Moonbucks is the only
supplier of coffee in town and faces the
following demand schedule each week.
– Write the correct answer on the answer
blanks, or underline the correct answer in
parentheses.
3.
What is the arc price elasticity of demand when the
price changes from $1 to $2? .18
(180 – 160) =
(180 +160)/2 =
(1 – 2) = |-1| =
(1 + 2)/2
=
20
= 0.117
170
1
1.5
= 0.666
.12
.67
So, over this range of prices, demand is (elastic / unit elastic
/ inelastic).
4.
What is the arc price elasticity of demand when the
price changes from $5 to $6? 1.22
20
90
.22
1
.18
5.5
So, over this range of prices, demand is (elastic /
unit elastic / inelastic).
Note: Because the relationship between quantity
demanded and price in inverse, price elasticity of
demand would always be negative.
Economists believe using negative numbers is
confusing when referring to “large” or “small”
elasticities of demand. Therefore, they use
absolute or positive numbers, changing the sign
on the negative numbers.
• Part E
– Now, consider Figure 8.4, which graphs the
demand schedule given in Figure 8.3.
– Recall the slope of a line is measured by the
rise over the run:
• Slope = rise / run = ∆P / ∆Q.
5.
Using your calculations of P and Q from Question 3, calculate
the slope of the demand curve.
1/20 or 0.05
6.
Using your calculations of P and Q from Question 4, calculate
the slope of the demand curve.
1/20 or 0.05
Change in Price
Hint:
Change in Quantity
7. The law of demand tells us that an
increase in price results in a decrease in
the quantity demanded.
Questions 5 and 6 remind us that the
slope of a straight line is constant
everywhere along the line. Along this
demand curve, a change in price of $1
generates a change in quantity
demanded of 20 cups of coffee week.
(#7. continued)
You’ve now shown mathematically that while the
slope of the demand curve is related to elasticity,
the two concepts are not the same thing. Briefly
discuss the relationship between where you are
along the demand curve and the elasticity of
demand. How does this tie into the notion of
responsiveness?
At a higher price, you are in the price elastic portion of the
demand curve. As you move to a lower price along a
demand curve, the demand curve becomes more price
inelastic. Thus, at a high price, a small percentage change
in price leads to a large percentage change in quantity. As
the price decreases, the same percentage change in price
generates a smaller percentage change in quantity, so the
elasticity of demand decreases.