Lesson Overview Lesson Overview Human Chromosomes Lesson Overview 14.1 Human Chromosomes.
Overview
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Overview Understanding elasticities Understanding elasticities and flexibilities and flexibilities » Implications on prices and Implications on prices and policy policy Producer and consumer Producer and consumer surplus surplus » Welfare analysis Welfare analysis
description
Overview. Understanding elasticities and flexibilities Implications on prices and policy Producer and consumer surplus Welfare analysis. Price elasticity. A measure of responsiveness of the quantity supplied or demanded to changes in prices. - PowerPoint PPT Presentation
Transcript of Overview
Overview
Understanding elasticities and Understanding elasticities and flexibilitiesflexibilities» Implications on prices and policyImplications on prices and policy
Producer and consumer surplusProducer and consumer surplus» Welfare analysisWelfare analysis
Price elasticityA measure of responsiveness of A measure of responsiveness of
the quantity supplied or the quantity supplied or demanded to changes in prices.demanded to changes in prices.
% Change in Qd or Qs of a good % Change in Qd or Qs of a good divided by % change in its own divided by % change in its own price holding all else equalprice holding all else equal» % Q / % P% Q / % P
Elasticity of Supply or Demand
Own price and quantity
Q / Q Q / Q
P / PP / PEp =Ep =
Ep =Ep = QQ
PPPPQQ
x
Ep =Ep = QQ0 0 - Q- Q1 1 P P0 0 + P+ P11
QQ0 0 + Q+ Q1 1 P P0 0 - P- P11
x
Price elasticity and curves
Ep changes along a sloping Ep changes along a sloping demand or supply curvedemand or supply curve
Special exceptionsSpecial exceptions
Relative measures
|Ep| > 1 elastic|Ep| > 1 elastic |Ep| = 1 unitary elastic|Ep| = 1 unitary elastic |Ep| < 1 inelastic|Ep| < 1 inelastic
Price Elasticity & Total Expenditures
Total expenditures by consumersTotal expenditures by consumersTE = P x QTE = P x QElastic demandElastic demand
» P and TE inversely relatedP and TE inversely related
Inelastic demandInelastic demand» P and TE directly relatedP and TE directly related
Price Elasticity & Total Expenditures
PP
Elastic
Inelastic
A
B
C
D
So what????
PP
QQ6 10
20
6055
7 11
15
Where are you on the demand curve?
X
Y
Do the mathQQ0 0 - Q- Q1 1 P P0 0 + P+ P11
QQ0 0 + Q+ Q1 1 P P0 0 - P- P11
xEp =Ep =
Point X: (6-7) / (6+7) X (60+55) / (60-55)
= -1/13 X 115/5 = -115/65 = -1.77 => elastic
TEx: Before 60x6=360, After 55x7=385
Point Y: (10-11) / (10+11) X (20+15) / (20-15)
= -1/21 X 35/5 = -35/105 = -0.33 => inelastic
TEy: Before 20x10=200, After 15x11=165
Elasticity and Price Volatility
PP
De
S1
P1
S2
P2
Di
P3
Elasticity and Price Volatility
PP
DL
S1
P1
PS
DSDI
S2
PI
PL
Consumers adjust to higher price levels over time.
Elasticity and Price Volatility
PP
D
SS
PS
SI
SL
PI
PL
Supplies adjust over time and are more elastic with time.
Income elasticity
Percentage change in quantity for a Percentage change in quantity for a 1% change in income1% change in income
Positive for most food itemsPositive for most food items Relatively small i.e., 0.2Relatively small i.e., 0.2
EiEi == QQ
IIIIQQ
x
Income effect on food demand
Food is normal goodFood is normal good» Income demandIncome demand» Positive income elasticityPositive income elasticity» Particularly important for meats Particularly important for meats » Emerging economiesEmerging economies
Services are a normal goodServices are a normal good» Income servicesIncome services
Cross-price elasticity of Supply
Percentage change in quantity for a 1% Percentage change in quantity for a 1% change in price of a another product such change in price of a another product such as an inputas an input
Positive or negativePositive or negative Much smaller than EpMuch smaller than Ep
EpEpjj = =QQkk
PPjj
PPjj QQkk
x
Cross-price elasticity of Demand
Percentage change in quantity for a 1% Percentage change in quantity for a 1% change in price of a substitute or change in price of a substitute or complementcomplement
Positive or negativePositive or negative Much smaller than EpMuch smaller than Ep
EpEpjj = =QQkk
PPjj
PPjj QQkk
x
Examples of Ag own price and income elasticities of
demand
EpEp EiEiBeefBeef -.62-.62 .45.45PorkPork -.73-.73 .44.44ChickenChicken -.53-.53 .36.36MilkMilk -.26-.26 -.22-.22GrapesGrapes -1.38-1.38 .44.44LettuceLettuce -.14-.14 .23.23
Own and Cross Price Elasticities
Ep of demand for beefEp of demand for beefBeefBeef -.62-.62PorkPork .11 .11LambLamb .01 .01ChickenChicken .06 .06OtherOther -.01-.01IncomeIncome .45 .45
Net change in quantity
Net effect of changes in own Net effect of changes in own price, cross price, and income price, cross price, and income multiplied by the appropriate multiplied by the appropriate elasticities.elasticities.
Addresses the fact that Addresses the fact that not all not all else is equal. else is equal.
Elasticities at market levels
P
Q
All food All meat All beef
All T-bone
Hy-Vee T-bone
Hy-Vee T-bone in Ames
Derived Demand The demand for inputs that are used to The demand for inputs that are used to
produce the final products.produce the final products. Examples:Examples:
» Flour => wheatFlour => wheat» Soybean meal => soybeansSoybean meal => soybeans» Fed cattle => feeder cattleFed cattle => feeder cattle
Marketing margin is subtracted from Marketing margin is subtracted from the buyer’s price to get producer price.the buyer’s price to get producer price.
Derived Demand
P
Q
Retail pork chop demand
Wholesale pork demand
Farm level demand for hogs
Demand for corn to feed hogs
Demand for inputs to produce corn
Derived Supply
Inverse of Derived DemandInverse of Derived DemandFrom the consumers perspectiveFrom the consumers perspectiveMarketing margin is added to the Marketing margin is added to the
producer’s price to reflect the producer’s price to reflect the consumer price.consumer price.
Elasticities at retail and farm
DRetail
P
Q
PR
Qe
DFarm
PF
M
Elasticity Summary
Relationship between Q and PRelationship between Q and P Changes along supply or demand curveChanges along supply or demand curve Elasticity and total expendituresElasticity and total expenditures Cross-price and income elasticitiesCross-price and income elasticities Relative sizeRelative size
» Own, cross, and incomeOwn, cross, and income» Farm v. retailFarm v. retail
Market Equilibrium
Supply and Demand curves crossSupply and Demand curves crossQuantity supplied equals quantity Quantity supplied equals quantity
demanded at a market clearing pricedemanded at a market clearing price
S
D
Pe
Qe
Excess Supply
The amount the quantity supplied The amount the quantity supplied exceeds quantity demanded at a exceeds quantity demanded at a given pricegiven price
Q
P S
D
Pa
Qd Qs
ES: Qs-Qd
Surplus
Excess Demand
The amount the quantity demanded The amount the quantity demanded exceeds quantity supplied at a given exceeds quantity supplied at a given priceprice
Q
P S
D
Pb
Qs Qd
ED: Qd-Qs
Shortage
Excess Supply and Demand
PricePrice QdQd QsQs ESES EDED
$10$10 2222 1313 ---- 99
$20$20 1515 1515 00 00
$30$30 88 1717 99 ----
Policy Analysis
Policy to impact either S or DPolicy to impact either S or DWhat are the objectives?What are the objectives?How does elasticity effect?How does elasticity effect?What are the impacts?What are the impacts?Winners and losersWinners and losersDeadweight lossDeadweight loss
Consumer Surplus
The difference between what consumers The difference between what consumers actually paid for a given quantity and the actually paid for a given quantity and the maximum amount the would have paid maximum amount the would have paid on an individual basis.on an individual basis.
Area Area aboveabove equilibrium price and below equilibrium price and below the demand curvethe demand curve
Consumer Surplus
P
Q
D
Pe
Area above equilibrium Area above equilibrium price and below the price and below the demand curvedemand curve
Producer Surplus The difference between what producers The difference between what producers
actually received for a given quantity and actually received for a given quantity and the minimum they would have accepted on the minimum they would have accepted on an individual basis. an individual basis.
Area Area belowbelow equilibrium price and above equilibrium price and above the supply curvethe supply curve
Producer Surplus
S
Pe
Q
Area Area belowbelow equilibrium equilibrium price and above the price and above the supply curvesupply curve
S & D Analysis
S
D
P
Q
Pe
Qe
CS
PS
New Sales Tax
S
D1
P
Q
P1
Q1
a
dPp
Q2
b
c
T
Pc
T=Pc-Pp
ef CS: -e-f
Impact
PS: -c-d
G: +d+f
Net: -c-e
New Sales Tax
S
D1
P
Q
P1
Q1
a
dPp
Q2
b
c
T
Pc
T=Pc-Pp
ef CS: -e-f
Impact
PS: -c-d
G: +d+f
Net: -c-e
Impact of Elasticity
S
D1
P
Q
P1
Q1
a
Pp
Q2
b
T
Pc
T=Pc-Pp
New Sales Tax
S
D
P
Q
P1
Q1
a
Pp
Q2
b
T
Pc
T=Pc-Pp
Price controls: Ceiling
S
D
P
Q
Pe
Qe
Pc
ad
b
e
Q1
c
Impact
CS: +c-d
PS: -c-e
Net: -d-e
Price controls: Floor
S
D
P
Q
Pe
Qe
Pf
a
d
b
Q1
c
e
Impact
CS: -c-d
PS: +c-e
Net: -d-e
Price controls: Floor
S
D
P
Q
Pe
Qe
Pf
a
d
b
Q1
c
e
Price controls
S
D
P
Q
Pe
Qe
Pf
Pc
Surplus
Shortage
Who holds the surplus?
How will the shortage be filled?
New Technology
S1
D
P
Q
P1
Q1
a
b
S2
P2
Q2
c d
e fg
Shift S1 to S2
Impact
CS: +b+c+d
PS: +f+g-b
Net: +c+d+f+g
Welfare Analysis Summary
Measures impact of interventionMeasures impact of interventionConsumer and producer surplusConsumer and producer surplusMeasures changes in both prices Measures changes in both prices
and quantitiesand quantities Impact may shift between Impact may shift between
consumer and producer or may be consumer and producer or may be lost to society as a deadweight losslost to society as a deadweight loss
