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Macroeconomics Lesson 2 Topics 1. Homework 2. Review Supply and Demand 3. Floors and Ceilings 4. Elasticity Correct the Homework Answers: 1. P = $7.50 Q = 350 2. P = 55¢ Q = 570 3. P = $375 Q = 85 4. P= $1375 Q= 17 Another S & D example Price 60 50 40 30 20 10 Qd 0 100 200 300 400 500 Price 60 50 40 30 20 10 Qs 500 400 300 200 100 0 Answer: Price = $35, Quantity = 250 What happens to price and quantity if the price of a substitute good increases? What happens to price and quantity if the cost of production decreases? Floors and Ceilings See the examples on the board. Price Elasticity of Demand Measures the sensitivity or (responsiveness) of quantity consumers demand to changes in the price of a product Equation for Coefficient of Elasticity of Demand % change in quantity ÷ % change in price The equation for determining the coefficient elasticity of demand is: [(Q1-Q2)÷(Q1+Q2)]÷[(P1-P2)÷(P1+P2)] Examples 1. Q1 = 250 Q2 = 300 P1=50 P2=40 Answer = 0.81 ( <1, inelastic) 2. Q1 = 250 Q2 = 500 P1 = $6 P2=$5 Answer = 3.66 (>1, elastic) 3. Q1 = 250 Q2 = 300 P1 = $6 P2=$5 Answer = 1 (unit elastic) More examples 4. Q1 = 500 Q2 = 500 P1 = $6 P2=$5 Answer = 0 (perfectly inelastic) 5. Q1 = 500 Q2 = 600 P1 = $5 P2=$5 Answer = undefined (perfectly elastic) Sesame Street School of Ed A key to identifying elastic or inelastic demand is the shape of the Demand Curve: The more the curve looks like a capital I, the more inelastic the demand, and the fewer the substitutes The more the curve looks like a capital E, the more elastic the demand, and there must be many substitutes Uses of Elasticity of Demand We can use Elasticity of Demand to determine the price where we Maximize Total Revenue Remember the equation for Total Revenue TR = Price x Quantity Other uses for Ed Tax incidence: who pays the tax? Predict the change in quantity from a change in price Evaluate the effectiveness of social policies Circular Flow