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Playconomics, LHS
At equilibrium : Qs = Qd
Therefore
88 - Qd = 0.1 Qs
Therefore
88 = 1.1Q therefore Q = 80
Substitute to find Price : P = 88 - 80 = 8
Diagram
Playconomics, LHS
At equilibrium : Qs = Qd
Therefore 60 -0.2Qd = 0.2 Qs + 10
Therefore 50 = 0.4Q therefore Q = 125
Substitute to find Price : P = 60 0. 2 (125) = 35
10
Diagram
11
Diagram
Diagram
Ceiling price:
P = 36 -2Qd
P = Qs
Assume a price ceiling at $6
Draw the diagram
Qs = P= 6
Diagram
Playconomics, LHS
19
Playconomics, LHS
20
Price Elasticity
Where Q is the original quantity and P is the
original price.
Q Q
Price elasticity
P P
Price Elasticity
Example
Originally
Price (P) = $100
Quantity (Q) = 20
New
Price (P) = $105
Quantity (Q) = 15
5 20 25
5 : Elastic
5 100
5
slope
vertical intercept
20
4
horizontal intercept
5
8 1
8
2
x
3 4 12
3
4 1 1
D1
4 12 2
6
4 1
D2
2
4
12
Definition:
Elastic Demand: Demand is elastic when the price
elasticity of demand is greater than 1.
Unit Elastic Demand: Demand is unit elastic when
the price elasticity of demand is equal to 1.
Inelastic Demand: Demand is inelastic when the
price elasticity of demand is less than 1.
Playconomics, LHS
25
Price
Total
Spending
Marginal
Spending
$10
$10
$10
$9
$18
$8
$8
$24
$6
$7
$28
$4
$6
$30
$2
$5
$30
$0
$4
$28
-$2
$3
$24
-$4
$2
$18
-$6
10
$1
$10
-$8
Law of Demand
if P Q
if P Q
but as price changes, elasticity of demand changes
at low ranges of quantity, demand is price elastic, but as
quantity increases, demand will become price inelastic
as demand (AR) falls, MR is falling more steeply
underneath it
Question
The absolute value of price elasticity of demand for a product is
2.0. Assume that the price for this product increases by 5 percent.
If sales before the price change were 200 units, what will sales be
after the price change, ceteris paribus?
(a) 180 units
(b) 190 units
(c) 210 units
(d) 220 units