Lecture 2.5
Leftovers:
Elasticity, Market Equilibrium &
Interesting Questions
Demand Elasticity &
Total Revenue Change
Individual Demand Curve
Price per unit
price per unit quantity demandedelasticity tot rev
$10
1
10
$9
2
-0.10
18
$8
3
-0.22
24
$7
4
-0.38
28
$6
5
-0.57
30
$5
6
-0.83
30
$4
7
-1.20
28
$3
8
-1.75
24
$2
9
-2.67
18
$1
10
-4.50
10
TR Max
$40
$30 Ed < 1
$20
Ed > 1
$10
$0
1 2 3 4 5 6 7 8 9 1
Ed = 1
Demand Curves
• Properties
– Marginal Value: (incremental) value of the
next unit demanded
– Marginal Revenue: (incremental) revenue of
next unit sold
– Average Revenue: average revenue received
for selling a given quantity
A Short Quiz
Seattle Times Oct 3, 2007
Olympic National Park officials are suggesting raising the price of an entrance pass
for motorists — good for seven days — from $15 to $25 starting in 2009, with the
fee for individuals such as cyclists climbing from $5 to $12. Season passes would
increase from $30 to $50
But public response, particularly from tourist-dependent local businesses has been
generally negative said a spokeswoman for Olympic National Park.
1.
Illustrate the effect of the increase of the price for park passes on
the demand for trips to the park
2.
Illustrate how the park fee increase would affect the demand for
other tourist-related businesses, e.g., hotels, restaurants.
Another Variation
• At each price, determine
whether there would be a
shortage (Qd > Qs) or a
surplus (Qs > Qd)
• If there was a shortage, how
would price adjust to clear the
market?
• If there is a surplus, how would
price adjust to clear the
market?
# of Pizzas
Demand
ed
Price Per
Pizza
# of Pizzas
Supplie
d
1000
$10
400
900
$12
450
800
$14
500
700
$16
550
600
$18
600
500
$20
650
Shortage or
Surplus
Answers
# of Pizzas Demanded
Price Per Pizza
# of Pizzas Supplied
Shortage (-) or Surplus (+)
1000
$10
400
-600
900
$12
450
-450
800
$14
500
-300
700
$16
550
-150
600
$18
600
0
500
$20
650
150
Price
(£)
The Cobweb Theorem
S
11
The
Assume
Farmers
the
respond
falls
initial
£5
by
equilibrium
and
planning
farmers
This
In price
acreates
‘divergent
atomassive
cobweb’
- to
price
increase
react
is
by
£7
cutting
supply,
and
the
plans
ten
quantity
months
for
turkey
9.
shortage
also termed
of 9 an
million
unstable
turkeys If
demand
later,
production.
the rises,
supply
the
months
of
shortage
turkeys
later,
is
and
cobweb
the
price
- Ten
theis
price
forced
tends
up
–to15
pushes
million.
supply
At
the
the
this
price
market
level,
upequilibrium.
to
there
will
£11be
will
per
8
and
move
soon
away
the
process
from
continues!
turkey.
be
million.
a surplus of turkeys and the
A divergent
price
drops. cobweb leads to
price instability over time.
7
5
D
8
9
15
17
D1
Quantity Bought and Sold
(millions)
Cobweb Theorem
• http://www.bized.co.uk/current/mind/2004_5/251004.ppt
• Hungarian-born economist Nicholas Kaldor (1908-1986)
• Simple dynamic model of cyclical demand with time lags
between the response of production and a change in
price (most often seen in agricultural sectors).
• Cobweb theory is the process of adjustment in markets
• Traces the path of prices and outputs in different
equilibrium situations. Path resembles a cobweb with the
equilibrium point at the center of the cobweb.
• Sometimes referred to as the hog-cycle (after the
phenomenon observed in American pig prices during the
1930s).
Useful Websites
– Understanding differences between factors
that cause shifts in demand or supply
• http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.h
tml
– Basics of demand and supply
• http://www.investopedia.com/university/economics/
economics3.asp
– Cobweb theorem
• http://www.bized.co.uk/current/mind/2004_5/25100
4.ppt
Markets for Biodiesel Fuel and
Food
•
Initial conditions
–
–
Corn is a major input (ingredient) to both food and
biodiesel
Gas prices have significantly increased during the
past few years in the automobile gasoline market
1. What is the impact of higher gasoline prices on
the demand for biodiesel?
2. What is the impact of higher gasoline prices on
the demand for food products?
More Questions
• #9 City Parks more polluted than country
club grounds
– Are people who use parks less concerned
than those who golf?
– Is it an issue of property-right assignment?
– CC tend to use fertilizers that seep into the
water table. Who owns the water table?
Diamond/Water Paradox
• Diamonds sell for a much higher price
than bottles of water. Does that mean
diamonds are more valuable than water?
Paul’s example
• Two brewers
• Two beers: Stout or Lager
– What is the opportunity cost?
• “Next” best alternative
Brewer
Gal of Gal of Opp Cost
Stout Lager of Stout
Opp Cost
of Lager
Jones
5
10
2 g lager
½ g stout
Brown
4
3
¾ g lager
4/3 g stout