Documente Academic
Documente Profesional
Documente Cultură
2006 Thomson/South-Western
$1.10
a b
Price
0.90
ED
q (q q) / 2 p (p p) / 2
Overall impact of lower price on total revenue depends on the net result of these opposite effects
8
10
TR = p x q
Total revenue
500
1,000
11
$100 90 80 70 60 b a
50
Price per unit 40 30 20
d 10 e D
100 200
500
12
Inelastic ED < 1
d e 100 200 500 D 800 900 1,000 Quantity per period
TR = p x q
Total revenue
500
1,000
13
E D=
E D= 0
a
b D" 60 100 Quantity per period
This demand curve indicates consumers will demand all that is offered at the given price, p. If the price rises above p, quantity demanded drops to zero.
This demand curve indicates that quantity demanded does not vary when the price changes; no matter how high the price, consumers will purchase the same quantity.
This demand curve is unit-elastic everywhere: any percent change in price results in an identical offsetting percent change in quantity demanded.
14
Availability of Substitutes
The greater the availability of substitutes for a good and the closer the substitutes, the greater the goods price elasticity of demand
The number and similarity of substitutes depend on how we define the good the more broadly we define a good, the fewer the substitutes and the less elastic the demand
15
Suppose the price increases from the initial price of $1.00 to $1.25. Dw shows that one week after the price increase, the quantity demanded has not changed much, from 100 to 95 After one month, Dm, it has declined to 75, and after one year, Dy, to 50 The longer the time period the larger the response to a given price change
$1.25 1.00
Dy
Dw 0 50 75 95 100
Dm
17
19
21
ES = p
S" ES = 1 $10
ES = 0
10
20
At one extreme is the horizontal supply curve. Here producers will supply none of the good at a price below p, but will supply any amount at a price of p
The most unresponsive relationship is where there is no change in the quantity supplied regardless of the price where the supply curve is perfectly vertical.
Any supply curve that is a straight line from the origin such as shown above is a unit-elastic supply curve.
22
Determinants
The responsiveness of sellers depends on how easy it is to alter output when price changes
If the cost of supplying additional units rises sharply as output expands, then a higher price will elicit little increase in quantity supplied But if the marginal cost rises slowly as output expands, the lure of a higher price will prompt a large increase in output
23
Length of Time
Supply also becomes more elastic over time as producers adjust to price changes
The longer the time period under consideration, the more able producers are to adjust to changes in relative prices
24
Sm
Sy
Price
$1.25 1.00
100
140
200
110
25
28
S
Price per bushel
S'
$8
D' D
10
14
29
30