8/11/2019 101 Notes 1-3

1/33

Class Notes

Chapter 1: Introduction to Economics

Definition (Parkin&Begg): Economics is the social science that studies the choicesof

individuals, businesses, governments about

1- whatgoods and services to roduce,

!- howto roduce these goods and services,

"- for whomto roduce these goods and services#

Whatto roduce$

%oods: steel, comuters, cars, houses, etc#

ervices: insurance, hotels, transortation, education, retail and 'holesale trade, etc#

Howto roduce$

actors of roduction: and, abor, *aital, Entrereneurshi# and is natural

resources, ra' materials, 'ater, air# abor is the time and effort given b+ 'orkers#

*aital is the machiner+, euiment and buildings used during roduction#

For whomto roduce$ ho 'ill be able to bu+ goods and services$ .his deends

on consumers/ income and budget constraint#

1.1 Scarcity:

0uman beings have unlimited 'ants# e 'ant the best cars, cell hones, houses,

education, vacations, etc# But 'e cannot obtain all of our 'ants because our

resourcesare limited# e need mone+ and time to bu+ and eno+ these goods and

services (from consumer/s ersective)# o our resources are scarce. Economics

considers how prices and markets allocate scarce resources to unlimited wants of

the society.

Example1:.urkish societ+ and government 'ants to ut a comuter in ever+

classroom in rimar+ schools# .he government also 'ants to build a nuclear o'er

1

8/11/2019 101 Notes 1-3

2/33

lant# .his 'ill reduce .urke+/s energ+ bill of !2 billion 3D ever+ +ear for natural gas

and oil to other countries# But the government does not hae enou!h moneyto

reali4e both obectives (%ovt# has a budget)# %overnment has to choose bet'een:

1- utting a comuter in ever+ classroom in the countr+

!- building a nuclear o'er lant#

.he fact that government has to choose 'here to send its mone+ is called a

tradeoff# ike government, all firms and individuals alwaysface tradeoffs# .he+ have

to allocate their scarce resources to their most efficient use#

Example":ever+ consumer has a certain incomeand has to do a #ud!et#5s a

consumer, +ou cannot bu+ ever+thing +ou 'ant# or e6amle, if +our monthl+ income

is 1777 liras, and +ou have to a+ 877 liras for rent and other bills, then +ou have "77

liras to decide 'hat to bu+# et us sa+ a nice cell hone is "77 liras and a te6tbook is

27 liras# .hen +ou have to choose bet'een the te6tbook and the cell hone# .his is a

tradeoff# 0ere, the opportunity costof one cell hone is eual to 9 te6tbooks#

1." $pportunity Cost

%efinition:(Parkin) .he opportunity costof an action is the value of the ne6t-best

alternative action# hen there are onl+ t'o goods as in the e6amle of cell hone

and te6tbook, # *ost is eas+ to calculate#

Example1:et us sa+ ; have 1 . in m+ ocket# ; 'ant to drink a cu of tea and eat 1

cookie# 5 cu of tea is 7#92 . and 1 cookie is 1 .# *an ; bu+ both the tea and the

cookie 'ith m+ 1 .$

8/11/2019 101 Notes 1-3

3/33

Example":n unda+ morning, ; have three choices: slee, go ogging or have

breakfast 'ith friends# 5ssume that m+ best choice is to slee, then to go ogging and

last choice is to have breakfast# .hen the o# *ost of sleeing is to go ogging# #

*ost of ogging is to have breakfast# .o illustrate # *ost concet, let us introduce

the &roduction possi#ilities frontier#

1.' &roduction &ossi#ilities Frontier

ike a consumer cannot consume ever+thing she 'ants, an econom+ cannot

roduce an infinite amount of goods and services# Because the resources of an

econom+ like abor, and and *aital are fi6ed (scarce) at an+ given time#

Economists like to use modelsto illustrate ideas, so 'e use PP to illustrate scarcit+

and tradeoff#

FI()*E 1(Parkin): Production Possibilities rontier sho's the boundar+ bet'een

'hat an econom+ can roduce and 'hat it cannot roduce#

9

15

55

5

5

1 32 4 5

A

B

D

E

F

C

Z

attainable

unattainable

pizzas (millions)

G

CDs (millions)

12

3

8/11/2019 101 Notes 1-3

4/33

Possibilit+: Pi44as (millions) *Ds(millions)5 7 12B 1 1?* ! 1!D " @E ? 2 2 7

.5BE 1

Idea:5s 'e 'ant to roduce more i44as, 'e must roduce less *Ds, because our

resources are limited (fi6ed)#Attainableoints are the oints inside and on the curve#

.he+ sho' oints that this econom+canroduce# nattainableoints are oints

be+ond the PP curve and these oints cannot be roduced# Points on the curve are

called efficient# .his means all of the resources are sent on roduction# 5t a oint

such as A, some of the resources are not used efficientl+, so 'e call such oints

inefficient# 5t oint A, 'e can roduce both more i44as and more *Ds# f 'e are on

oint D and 'e 'ant to increase *D roduction, the onl+ 'a+ is to decrease i44a

roduction# o oint D is efficient and A is not#

$pportunity cost: 5t oint *, 'e roduce ! i44as and 1! *Ds# f 'e 'ant to

increase i44a roduction from ! to ", 'e cannot do this 'ithout decreasing *D

roduction from 1! to @# .his is because a oint such as % is imossible to roduce#

.hen the oortunit+ cost of 1 i44a is " *Ds# ne i44a costs us " *Ds# .o get 1

i44a, 'e give u " *Ds# e come to oint D# e can also calculate the oortunit+

cost of one *D in terms of i44as# 5t oint D, increasing *Ds b+ " costs us 1 i44a#

o oortunit+ cost of 1 *D is 1=" i44a ("*D>1i44a, 1*D>1="i44a)#

Increasin! opportunity cost: *ost of 1 i44a is not constant# rom oint D, if

'e 'ant to increase i44as again b+ 1, then 'e have to give u ? *Ds and come to

4

8/11/2019 101 Notes 1-3

5/33

oint E# .hen the oortunit+ cost of 1 i44a becomes ? *Ds#

8/11/2019 101 Notes 1-3

6/33

roduce each good and 'ho 'ill be able to bu+ the goods that are roduced# .his

lanning is ver+ comlicated 'hen +ou think of millions of goods and services to be

roduced# ;f eole start to like i44as more in a centrall+ lanned econom+, then

the+ have to 'rite letters to the government and ask for more i44a restaurants in

their to'n# ;t 'ould be a ver+ inefficient s+stem# Prices do not signal and influence

bu+er and seller behavior in a centrall+ lanned econom+#

;n a free market econom+, rices are ver+ imortant signals that determine behavior

of bu+ers and sellers# hat about the last global financial crisis that hit 3, Euroe

and Gaan$ hat 'e are learning from this crisis is mar-etsshould not #e

completely free from !oernment interention# Hules and regulations imosed b+

the government in the financial sector and the other sectors are necessar+#

1. /icroeconomics and macroeconomics

Economics has t'o broad branches: microeconomics and macroeconomics#

/icroeconomics studies the economic decisions of an individual, firm or grous of

firms and individuals# 5lso, microeconomic roblems are specific to an industr+

(>sector) or a commodit+# or e6amle, microeconomic uestions include:

1- h+ are eole bu+ing more DIDs and less movie tickets$

!- 0o' 'ould a ta6 on internet shoing affect e-Ba+$

"- hat are the effects of a strike in .urkish 5irlines on tourism industr+$

?- hat is the effect of the strong lira on te6tile industr+$

/acroeconomicsstudies the econom+ as a 'hole# acro does not consider an

individual or firm or industr+ (sektJr)# acroeconomics studies the .urkish Econom+

or another countr+/s econom+, or the global econom+# acro uestions include:

1- %ross Domestic Product: .his is the total value of all goods and services

roduced in a countr+ in a +ear# %DP er caita sho's the average income

of a erson in a countr+#

6

8/11/2019 101 Notes 1-3

7/33

!- *onsumer Price ;nde6: 5verage rice of all goods and services that a

consumer bu+s# ;nflation is the rate of change (increase) of *P;#

"- *an the *entral Bank of .urke+ make ever+one richer b+ rinting mone+

and droing from helicoters$

8/11/2019 101 Notes 1-3

8/33

Chapter ": 0asics of Supply and %emand

".1 /ar-et

5 market is an arrangement 'here bu+ers and sellers of a good or service meet#ometimes this is a lace, like a vegetable-fruit Ba4aar or the suermarket#

ometimes bu+ers meet sellers on the telehone or the internet# e categori4e

markets according to the good, for e6amle Kmarket for milkL or Kmarket for tobaccoL

or Kmarket for stock e6change ;FBL# arkets can be defined narro' or 'ide: market

for milk versus market for food#

"." %emand

Demand is the total uantit+ of a good that bu+ers 'ant to bu+ at ever+ rice during

a given time eriod# Demand e6lains #ehaior of #uyersconsumers in a market#

n this .5BE !, the demand for a chocolate bar is given#

.5BE !

Point Price(liras er

bar)

2uantity %emanded3millions of #ars per

wee-45 7#2 !!B 1#7 12* 1#2 17D !#7 8E !#2 2

5he law of demand: rom .able !, 'e can see that as the rice goes u, bu+ers

'ant to bu+ less# .his is the la' of demand: ther things constant, the higher the

rice of a good, the smaller is the uantit+ demanded and the lo'er the rice of a

good, the greater is the uantit+ demanded#

%emand cure isthe grahical reresentation of a demand relationshi bet'een

rice and uantit+ demanded#

!

8/11/2019 101 Notes 1-3

9/33

;%3HE !

6 %emand7 ersus 68uantity demanded7: .he term demand refers to the entire

relationshi bet'een the rice of a good and the uantit+ demanded at eery price#

Demand is reresented as a demand curve# .he 8uantity demanded of a good is

the uantit+ that consumers 'ant to bu+ at a particular price# Muantit+ demanded is

a oint on the demand curve#

Chan!e in demand: ;f some other factor other than rice changes the demand

behavior of consumers for a good, then the demand curve shifts.hen demand

curve shifts, this means that uantit+ demanded changes at ever+ rice# igure " and

.able " illustrate an increase in demand for chocolate# 0ere, t+ of chocolate

demanded increases b+ 17 bars at eery price#

Point Price(liras er

bar)

Muantit+Demanded

(millions of barser 'eek)

Point Muantit+demanded

5 7#2 !! 5/ "!B 1#7 12 B/ !2* 1#2 17 */ !7

D !#7 8 D/ 18E !#2 2 E/ 12

"#5

1#5

2#"

1#"

251"5 15 2"

2#5

3#"E

$uantit% &eman&e&(million ba's)

D

C

B

A

p'ie (li'asba')

&eman& *o' ene'+%

ba's

9

8/11/2019 101 Notes 1-3

10/33

5a#le ' : 9n Increase in %emand

FI()*E': 9n Increase in %emand 3demand cure shifts to ri!ht4

/oement alon! the demand cure: ;f all other factors are constant and onl+ rice

of the good changes, then 'e move along the original demand curve# or e6amle,

starting 'ith the original demand, if the rice of chocolate increases from 1 lira to !

liras, then uantit+ demanded decreases from 12 to 8# ;n this case demand curve

does not shift because the change is a rice change#

"#5

1#5

2#"

1#"

251"5 15 2"

2#5

3#"E

$uantit% &eman&e&(million ba's)

D

C

B

A

p'ie (li'asba')

32

E,

D,

C,

B,

A,

1"

8/11/2019 101 Notes 1-3

11/33

Factors that chan!e demand 3and shift the demand cure4:

.he follo'ing nonprice factors cause demand curve to shift. ;f rice of the good

changes, demand curve does not shift, 'e move along the curve#

1 &rices of related !oods: *onsider the market for (gas) ben4ene# ;f the rice

of P% decreases, all other things constant, 'hat haens to demand for

ben4ene$ Demand for ben4ene decreases because eole 'ill bu+ cars that

oerate 'ith P% instead of ben4ene# P% and ben4ene are thus substitute

!oods# 5 substitute is a good that can be used in lace of another good (E6: a

.o+ota and a 0onda, .ea and *offee)#

;f the rices of cars decrease, 'hat haens to demand for ben4ene$ Demand for

ben4ene increases because ben4ene and cars are complement goods# 5

comlement is a good that is used together 'ith another good (E6: tea and

sugar)#

" Income:3suall+ 'hen income increases, demand for most goods increases#

.hese are called )ormal goods like cars, 'ashing machines, etc# ;f the

demand for a good increases 'hen incomes rise, this good is called a normal

!ood # ometimes, 'hen their income increases, eole bu+ less bread, or

less bus tickets (the+ bu+ a car instead)# 0ere bread and bus tickets are called

inferiorgoods# ;f the demand for a good decreases 'hen incomes rise, this

good is an inferior good#

' Expected future prices. ;f ever+bod+ starts to e6ect the rice of ben4ene to

increase ne6t 'eek on onda+, 'hat 'ould the+ do$ .he+ 'ould go and fill

their tanks toda+# Demand for ben4ene toda+ increases# imilarl+, if ever+one

starts to e6ect the rice of latos to decrease ne6t month, then +our

11

8/11/2019 101 Notes 1-3

12/33

demand for latos toda+ decreases# Peole 'ait to bu+ latos at a cheaer

rice# o a change in rice e6ectations influence toda+/s demand#

, 5astes fashion# Peole demand more vegetables toda+ because of health

concerns# imilarl+ more sring 'ater is sold toda+ because most eole do

not drink ta 'ater toda+# !7 +ears ago man+ eole drank ta 'ater and

demand for sring 'ater 'as ver+ small#

&opulation !rowthcauses demand for man+ goods to rise# *omare

demand for cars in .urke+ toda+ and !7 +ears ago#

; Season. ood demand increases during Hamadan, demand for airline travel

increases during summer# Demand for electricit+ and P% increase in 'inter# .hese

effects are called seasonalit+#

".' Supply

'upply is the total uantit+ of a good that sellers 'ant to sell at ever+ rice

during a given time eriod# ul+ e6lains the behavior of sellers in a market#

/uantity supplied of a good or service is the amount that sellers 'ant to sell at

a articular rice during a given time eriod# .able ? sho's the sul+ of

chocolate#

Point Price 2uantitysupplied

5 7#2 7B 1#7 9* 1#2 17D !#7 1"E !#2 12

590

8/11/2019 101 Notes 1-3

13/33

FI()*E ,

8/11/2019 101 Notes 1-3

14/33

FI()*E

%eterminants of supply:actors other than rice that influences sul+ of a good#

1- 5echnolo!ical improements, ;t becomes easier to roduce goods#

;ncreases sul+#

2- &rices of inputs, ;f rice of electricit+ is larger, 'hat haens to the sul+ of

bathrobes$ ;f rice of et fuel increases, 'hat haens to sul+ of airline

tickets$ Decreases sul+#

3- Expected future prices:;f the rice of a good is e6ected to rise in the future,

then sul+ decreases toda+ and increases in the future# or e6amle, if the

food traders e6ect the rice of olive oil to increase ne6t month, then the+

store more olive oil and sell a small amount no'# Because the+ can make

much more rofit ne6t month#

4- 5he num#er of suppliers:.hink of 17 +ears ago# Price of an air conditioner

'as more than 1777 3D# .oda+ +ou can bu+ the same 5* for 277 3D# .his

is because ten +ears ago onl+ imorted 5*s 'ere sold in .urke+# .oda+, man+

"#5

1#5

2#"

1#"

251"5 15 2"

2#5

3#"

E

$uantit%supplie&(million ba's)

D

CB

A

p'ie (li'asba')

suppl% o* ene'+% ba's

ne- suppl%

3"

14

8/11/2019 101 Notes 1-3

15/33

comanies including Iestel and 5rNelik are roducing and selling 5*s# o

sul+ of 5*s is much greater than 17 +ears ago#

"., /ar-et E8uili#rium:

Euilibrium is a situation 'here uantit+ sulied euals uantit+ demanded in a

market# ;n a free market, price balances demand and sul+ and brings the market

to an euilibrium#

E8uili#rium priceis the rice at 'hich uantit+ sulied euals the uantit+

demanded# E8uili#rium 8uantityis the uantit+ bought and sold at the euilibrium

rice#

Surplus Case

For example, if the current rice of otatoes is 7#2 lira=kg, and if the uantit+ sulied

is 177 tons this 'eek, and uantit+ demanded is O7 tons, then is this market at

euilibrium$ hat do +ou e6ect to haen to the rice$

.his market is not at euilibrium because there is a surplus of potatoes# nl+ O7

tons of otatoes 'ill be sold# hen otato sellers cannot sell the remaining !7 tons,

the+ start to cut rice# 5lso otato farmers decrease otato roduction# hen sellers

cut rices belo' 7#2 lira, uantit+ demanded increases and surlus amount

decreases belo' !7 tons# .his rocess goes on until surlus amount becomes 4ero#

'o in case of a surplus, price decreasesso that 0uantity demanded balances

0uantity supplied.

8/11/2019 101 Notes 1-3

16/33

!#2 2 12 17590usts(decreases

or increases) to bring the market into euilibrium# hen there is surlus, sellers 'ill

cut rices to eliminate unsold stocks# hen there is a shortage, then sellers 'ill

"#5

1#5

2#"

1#"

251"5 15 2"

2#5

3#"

$uantit%

supplie&(million ba's)

p'ie (li'asba')

suppl% o* ene'+% ba's

&eman& *o' ene'+%

ba's

E$uilib'ium

16

8/11/2019 101 Notes 1-3

17/33

increase rices and some bu+ers are still 'illing to a+ the higher rice for chocolate#

.hese rocesses sho' thatprice coordinatesthe plans of buyers and sellers so that

market moves toward e0uilibrium.

". &redictin! Chan!es in &rice and 2uantity

9n increase in demand:

ee igure 8 and .able 8# tarting from euilibrium osition, let us assume that

demand for chocolate increases for some reason# a+be because it is the

Ialentine/s Da+#

5t the current rice of 1#2 lira, there is a shorta!eof 17 m chocolate in the market#

.his causes rice to increase# hen rice increases, uantit+ demanded decreases

and uantit+ sulied increases# Price increases until the shortage becomes 4ero#

5fter some time, shortage is 4ero and the market is at euilibrium#

8/11/2019 101 Notes 1-3

18/33

8/11/2019 101 Notes 1-3

19/33

FA()*E @

ince sul+ has increased, at the initial euilibrium rice of 1#2 liras, there is a

surlus of chocolate# .his causes the rice to fall# 5s the rice falls, t+ demanded

increases and uantit+ sulied decreases# .his causes the surlus to shrink# .his

rocess stos at the ne' euilibrium rice of 1#7 liras# 5t the ne' ebm, 12 m bars

are bought and sold# o ne' euilibrium t+ is 12 m bars#

Summary: hen sul+ of a good increases, its rice decreases and its uantit+

sold increases# E6: ;n .urke+, sul+ of 5*s have increased in the last five +ears# 5*

rices have fallen a lot and t+ of 5*s sold have increased#

*onversel+, if sul+ of a good decreases, then rice increases and t+ sold

decreases#

.here are 9 combinations of sul+ and demand changes# 5s an e6ercise, tr+ to see

'hat haens to euilibrium rice and uantit+ in each case#

1- *hange in demand, no change in sul+,

!- *hange in sul+, no change in demand

"- ;ncrease both in demand and sul+

"#5

1#5

2#"

1#"

251"5 15 2"

2#5

3#"

$uantit%supplie&(million ba's)

p'ie (li'asba')

ne- suppl%

3"

ol& suppl%

19

8/11/2019 101 Notes 1-3

20/33

?- Decrease both in demand and sul+

2- Decrease in demand and increase in sul+

9- ;ncrease in demand and decrease in sul+

Chapter ': 9pplications of Supply and %emand

2"

8/11/2019 101 Notes 1-3

21/33

3.1 &rice controls:

%overnment intervenes into free markets in the form ofprice ceilings andprice floors.

3.1.1 &rice Floor

5 rice floor is a minimum rice set and enacted b+ the government for a good or

service# ;t makes the sale of a good or service belo' a certain rice illegal# .he

.urkish govt# sets price floorsfor several food roducts# ome e6amles are

ha4elnuts, tobacco, tea and 'heat# Why does the !ot. hae such a policy+In

order to support the farmers. 3suall+, if a grou of roducers is a member of a

union or the+ are a oliticall+ imortant grou, the+ have !reater #ar!ainin! power

and force the government to olicies that benefit its members# igure @ sho's the

effect of a rice floor in ha4elnut market#

;%3HE @: Price loor

or e6amle, assume that the ebm rice for ha4elnuts is " liras# or a rice floor to

hae a real effect 3#e 6#indin!74, it must be above the ebm rice# 5 rice floor

belo' " liras 'ould have no real effect on the market outcome# et us assume that

after negotiations bet'een the govt# and ha"elnut producers confederation, the price

.

li'as/+

0 (/+s)

D

e$bm p'ie3

p'ie *loo'5

su'plus amount

21

8/11/2019 101 Notes 1-3

22/33

flooris set to be 2 liras=kg# .his olic+ causes a surlus amount of ha4elnuts as

sho'n on the igure# hat haens to the surlus amount of ha4elnuts$ 0o' does

the govt# kee the rice high and revent the market from moving to'ard ebm$ 1y

buying the surplus amount.ometimes the govt# is able to sell this amount, but most

of the time, sells it for a rice a lot less than the rice it has aid for it# .his causes

the govt# institutions like iskobirlik to have deficits# ho a+s for these losses$ .he

treasur+ a+s, and so the ta6a+ers a+#

5nother rice floor in the labor market is the minimum wa!e# B+ the same reasoning

as above, minimum 'age causes a surlus of labor 'hich is also called

unemployment# ho' on the same figure#

'.1." &rice Ceilin!

5 rice ceiling is a maximum priceset and enacted b+ the government for a good or

service# ;t makes the sale of a good or service above a certain rice illegal# *onsider

the price ceilin!for bread, 7#27 . er loaf#h+ does the government think a rice

ceiling is necessar+$ %ovt# 'ants to suort oor consumers through this olic+#

igure 17 sho's the effect of a rice ceiling on bread#

.

li'aloa*

0 (loaes)

D

e$bm p'ie

"#5

p'ie eilin+

"#

so'ta+e amount

22

8/11/2019 101 Notes 1-3

23/33

;%3HE 17

5ssume the ebm rice of bread is 7#8 lira# 5 binding rice ceiling must be belo' the

ebm rice# !therwise it would have no effect on the market..he resultof the price

ceilin!is that there is a shorta!e of #readin the market# hen there is a shortage

of a good, it must be rationed 'ith some kind of mechanism# hich bu+ers 'ill be

able to get the limited amount of bread$ During the ;; +ears, bread 'as

distributed 'ith a KkarneL, a ration couon that gives ever+ erson a right to one loaf

er da+# ;f 'e assume that bread is distributed according to Kfirst-come, first-servedL

rincile as it is the case toda+, then eole have to 'ait in line to get bread# 5lso,

+ou cannot find the regular bread after 8m in the evening# .his is because the

bakeries do not 'ant to sell the chea bread the+ bake onl+ a limited uantit+# .he+

bake other t+es like francala that there is no rice restriction and so more

e6ensive# o rice ceilings have un'anted conseuences like this#

*ent ceilin!:%ood for the oor# ho' the short term and long term effects b+

dra'ing t'o sul+ curves# ;n the short term, sul+ curve is stee because it is

difficult for houseo'ners to resond to the olic+ uickl+# ;n the long term, available

housing for rent ma+ decrease as houseo'ners start to use their houses for other

more rofitable uroses# .his is an e6amle of un'anted conseuences of rice

controls#

23

8/11/2019 101 Notes 1-3

24/33

;%3HE 11

hortage of houses available for rent increases in the long term# e 'ill have similar

results if the government decides to enact a la' that restricts the rate of increase of

rents, like 2Q er +ear#

8/11/2019 101 Notes 1-3

25/33

Price elasticity of demand (PED) measures the sensitivit+ of uantit+ demanded to

changes in rice# PED is defined as the ercentage change in the uantit+ of a good

demanded divided b+ the corresonding ercentage change in its rice#

p'iein3an+e6

&eman&e&$t%in3an+e6=PED

Point Price (lira=ticket) Muantit+ of ticketsdemanded (1777)

Price Elasticit+ ofDemand

5 1!2 7B 177 !7 * 82 ?7 - ?D 9!#2 27 - 1#2E 27 97 -1 !2 O7 - 7#98% 7 177 -7#!2

590

8/11/2019 101 Notes 1-3

26/33

5B

Price change of 1!2177 is a ercentage change of (-!2 = 1!2) R 177 > -!7Q#

*orresonding Mt+ change of 7!7 is a ercentage change of

(!7 = 7) R 177 > + # .hen PED > #

B*

Price change: 17782 is (-!2 = 177)R177 > -!2Q

Mt+ change: !7?7 is (!7=!7)R177 > 177Q# .hen the PED > 177=-!2 > -?#

DE

Price change: 9!#227 is (-1!#2=9!#2)R177 > -!7Q

Mt+ change: 2797 is (17=27)R177 > !7Q # .hen PED > -1#

Demand is elasticif SPEDS T 1# Demand is inelasticif SPEDS U 1# Demand is unit

elasticif SPEDS > 1# ;n our e6amle, demand is elastic through oints 5, B and *#

Demand is inelastic through oints E, and %# Demand is unit elastic at oint D#

Why is elasticity important+*onsider +ourself as a manager of a football club, sa+

%alatasara+# .able 17 sho's demand for tickets and total revenue# Cour obective is

to ma6imi4e .otal Hevenue from ticket sales 'here

5otal *eenue 35*4 B &rice 3&4 Num#er of tic-ets sold 324

Price (lira=ticket) Muantit+ oftickets

demanded(1777)

Price Elasticit+of Demand

.otalHevenue

1!2 7 7

26

8/11/2019 101 Notes 1-3

27/33

177 !7 !77782 ?7 - ? "777

9!#2 27 - 1#2 "1!227 97 -1 "777!2 O7 - 7#98 !777

7 177 -7#!2 7

590

8/11/2019 101 Notes 1-3

28/33

echanical Engineering Products 1#"7urniture 1#!9otor Iehicles 1#1?.ransortation services 1#7"

&rice Inelastic %emand%as, Electricit+ and ater 7#@!*hemicals 7#O@Drinks 7#8O*lothing 7#9?.obacco 7#91Banking and ;nsurance 7#290ousing 7#225gricultural and ish Products 7#?!Books, aga4ines, ne'saers 7#"?ood 7#1!

il 7#72590

8/11/2019 101 Notes 1-3

29/33

difference bet'een short term and long term resonses, let us consider the 1@8"

oil crisis#

$il price shoc- of 1=?'?,

5PE* (rgani4ation of 5rab Petroleum E6orting *ountries) agreed to restrict oil

sul+ to 3## and estern Euroe in resonse to 1- estern ressures for chea

crude oil, !- .heir suort for ;srael# igure 17 sho's the short-term and long-term

effects of this#

%3HE 1": Elastic and inelastic demands

In the shortterm 31 year4, rice of crude oil had uadruled b+ 1@8?# .his is

because demand for oil is very inelastic in the short term, elasticity is around 7#72# 5s

sho'n on art (a) of igure 1", the decrease in the sul+ of crude oil led to a large

increase in its rice but a small decrease in t+ of oil sold# .his means that the

revenue of PE* countries increased ver+ sharl+ 1 +ear after the oil embargo#

But in the lon!term as the time passed, consumers 'ere better able to substitute

a'a+ from oil b+ bu+ing smaller cars, use ublic transortation, and use alternative

1""$uantit% &eman&e&

(ba''els)

A

p'ie (&olla'sba''el)

"

inelasti &eman&(a)elasti &eman&(b)

D

D

,

,

D

D

,

,

29

p'ie (&olla'sba''el)

8/11/2019 101 Notes 1-3

30/33

energ+ sources such as natural gas, nuclear o'er, 'ind and 'ater# 3se aer bags

instead of lastic bags, etc# $emand is much more elastic in the long6term than in the

short6term. o in the long-term, the demand curve is much flatter as in art (b) of

igure 17# 5s a result, the same fall in the sul+ of oil roduced a small rice

increase but a large decrease in t+ of oil sold in the long-term# .hen the PE*

revenues decreased a lot as time assed# .he real rice of crude oil decreased back

to levels close to the re-crisis levels in 1@O9#

5nother factor that contributed to the revenue decline 'as that oil roduction made

b+ non-PE* countries significantl+ increased in the long-term# .his resonse b+

non-PE* countries made the long-term sul+ of oil more elastic# PE* revenues

decreased further# ;t 'as easier to kee rices high in the H than in H#

Cear: *rude oil rice change Q

8"-8? 27

8@ 1?

O7 "?

O1 "?

O! -17

O" -17

O? -17

O2 -17

O9 -?2

6Can !ood news for farmin! #e #ad news for farmers+7

*onsider market for 'heat# heat has an inelastic demand# 5ssume initiall+ the

market is at ebm#

8/11/2019 101 Notes 1-3

31/33

farming t'o times the old amount# ul+ curve 'ill shift right# .he ne' ebm 'ill be

at some oint 'ith a lower price and a hi!her 8ty# .his is good for consumers

because the+ are able to bu+ 'heat & bread cheaer# But is this good for 'heat

roducers$ .he ans'er deends on PED#

3nfortunatel+, ..5 HEIE

8/11/2019 101 Notes 1-3

32/33

inomein3an+e6

&eman&e&$t%in3an+e68ED=

*onsider demand for tomatoes, lato comuters and bus tickets# hich one do +ou

think has a larger income elasticit+ of demand$ *onsider the case 'hen +our income

rises from 1777 liras a month to 2777 liras a month# 0o' much does +our demand

for tomatoes increase$ 0o' much does +our demand for a tri to Paris increase$

0o' about bus tickets$ Luxury goodshave an ;ED larger than one# 5irline travel is

a lu6ur+ good# Necessity goodshave an ;ED less than one# .omatoes, tobacco,

clothing are necessit+ goods#

Normal goodshave a positie income elasticit+ of demand# ost goods are normal#

nferior goodshave a negative income elasticit+ of demand (;ED)# Bus tickets are

e6amles of inferior goods# .able 1! sho's some real 'orld income elasticities of

demand#

Income Elastic %emand5irline travel 2#O!ovies "#?1oreign travel "#7OElectricit+ 1#@?Hestaurant meals 1#910aircuts 1#"95utomobiles 1#78

Income Inelastic %emand.obacco 7#O9

5lcoholic Drinks 7#9!urniture 7#2"

32

8/11/2019 101 Notes 1-3

33/33

*lothing 7#21