February 25th

1. Does the equilibrium price for a particular product rise or fall with each of the following changes? Draw small freehand graphs to illustrate your answers.

2. Consider each of the following scenarios in the North American gasoline and oil market. Draw freehand demand and supply graphs to determine the changes in quantities demanded and supplied, and in market prices, in response to these scenarios.

b) After 11 September 200, the North American economy slips into a recession, and automobile sales plummet. c) War in the Middle East results in a sharp fall in oil exports to North America. d) Automobile manufacturers develop new engines that significantly improve the fuel efficiency of all models.

The responsiveness of quantities demanded and supplied to changes in price. How much more or less will people buy at various prices?

Measures the actual change in quantity demanded for a product whose price has changed. Known as the PRICE ELASTICITY OF DEMAND.

coefficient of demand elasticity

Ed =

Qd Pd The effect of change (people buying more or less)

Cause of change (the change in price that affects peoples buying)

Can also look like this

A gas station sells 10 million litres of gas a month at $0.50 per litre. If the gas station increases their price to $0.54 a litre, demand falls to 9.5 million litres. With this information we can calculate a coefficient that the station owners can use in pricing decisions.

First we calculate the percentage in change of price. $0.54 - $0.50 = $0.04 (p1-p0)

Average of both is $0.52 (50+54)/2

(p1+p0)/2

4/52*100=7.96% This will be our denominator!

To find the % change in quantity demanded, use the average between the original quantity sold and the quantity after the price change.

(10 + 9.5) / 2 = 9.75

(Q2-Q1)/2
(Q2-Q1)

The change in quantity is -0.5 SO!

-0.5/9.75 * 100 = -5.128% or 5.13%

We ignore the because we just want to know the amount of change not direction.

% change in quantity demanded = 5.13%

% change in price = 7.96%

= 0.667 or 0.67 This is an inelastic change because it is less than one.

Inelastic: less than 1 An increase in price increases revenue even when demand falls. Ex. Gas prices rise but the demand stays the same. Eggs, milk diapers, etc. People need these things so, even if the price increases, they will still buy them.

Elastic: a number greater than 1 As the price rises, quantity demanded decreases. As the price drops, quantity demanded increases. Buying a house, Crunchy bar, cruises, etc. Things you dont really need.

Unitary Elasticity: 1:1 The percentage change in price is equal to the percentage change in demand. The dividing line between elastic and inelastic demand.

Suppose the Toronto Star estimates that if it raises the price of its newspaper from $1.00 to $1.50 then the number of subscribers will fall from 50,000 to 40,000.

Change in quantity/average quantity Change in price/ average price

Change in quantity = 10 000/45 000 Change in price = .50/1.25

= 0.22/0.4
= 0.55

If the Toronto Star's only concern is to maximize total revenue, should it raise the price of a newspaper from $1.00 to $1.50? Why or why not?

Yes.
Since the price elasticity of demand is less than one (inelastic), an increase in price will increase total revenue.

Suppose you are given the following data on demand for a product. What is the price elasticity of demand when price decreases from $9 to $7? Price $10 $9 $8 $7 $6 Quantity Demanded 40 50 60 70 30

Change in quantity = 20/50 Change in Price = 2/8

Change in Q/Change in P = 0.4/0.25

= 1.6

http://www.youtube.com/watch?v=1nTGULD Fodw

Number of substitute goods available Percentage of income spent Luxury or necessity Addictive habits Time Peak vs. Off-Peak

Elasticity of Supply