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Lecture Understanding economics (2nd edition): Chapter 3 - Mark Lovewell, Khoa Nguyen

Chapter 3 - Competitive dynamics and government, after this chapter, you will be able to: Describe price elasticity of demand, its relation to other demand elasticities, and its impact on sellers' revenues; define price elasticity of supply and identify the links between production periods and supply; identify how price elasticities of demand and supply determine the impact of an excise tax on consumers and producers. | Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 3 Competitive Dynamics and Government Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Elastic and Inelastic Demand (a) Price elasticity of demand shows how responsive consumers are to price changes elastic demand means % change in quantity demanded is more than % change in price inelastic demand means % change in quantity demanded is less than % change in price unit-elastic demand means % change in quantity demand equals % change in price Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Elastic and Inelastic Demand (b) Figure 3.1 Page 56 Elastic Demand Curve for Ice Cream Cones 0 500 1000 0.40 0.80 1.20 1.60 2.00 2.40 20% 50% 20% 10% Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. D1 D2 Quantity Demanded (cones) Price ($ per cone) Inelastic Demand Curve for Ice cream Cones 0.40 0.80 1.20 1.60 2.00 2.40 0 500 1000 Quantity Demanded (cones) | Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 3 Competitive Dynamics and Government Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Elastic and Inelastic Demand (a) Price elasticity of demand shows how responsive consumers are to price changes elastic demand means % change in quantity demanded is more than % change in price inelastic demand means % change in quantity demanded is less than % change in price unit-elastic demand means % change in quantity demand equals % change in price Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Elastic and Inelastic Demand (b) Figure 3.1 Page 56 Elastic Demand Curve for Ice Cream Cones 0 500 1000 0.40 0.80 1.20 1.60 2.00 2.40 20% 50% 20% 10% Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. D1 D2 Quantity Demanded (cones) Price ($ per cone) Inelastic Demand Curve for Ice cream Cones 0.40 0.80 1.20 1.60 2.00 2.40 0 500 1000 Quantity Demanded (cones) Price ($ per cone) * Perfectly Elastic and Perfectly Inelastic Demand (a) Perfectly elastic demand means constant price and a horizontal demand curve Perfectly inelastic demand means constant quantity demanded and a vertical demand curve Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Perfectly Elastic and Perfectly Inelastic Demand (b) Figure 3.2 Page 57 Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Perfectly Elastic Demand Curve for Soybeans 0 1.60 D3 Quantity Demanded (tonnes) Price ($ per tonnes) Perfectly Inelastic Demand Curve for Insulin 0 1000 Quantity Demanded (litres) Price ($ per tonnes) D4 * Total Revenue and the Price Elasticity of Demand A price change causes total revenue to change in the opposite direction when demand is elastic A price change causes total revenue to change in the same direction when demand is inelastic A price change does not affect total revenue when demand is unit-elastic Copyright © 2002 by McGraw-Hill