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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