I2M: Chapter 3 / 4
UniGe I2M Chapter 3 / 4
UniGe I2M Chapter 3 / 4
Causes for a shift of the demand curve
- Tastes and preferences
- Income and wealth
- Availability and prices of related goods
- Buyer’s expectations of the future
Why does the demand curve have a negative slope?
- Extensive margin: Newspapers: as the price goes down the number of people willing to purchase a newspaper increases (each buyer buys at most one unit).
- Intensive margin: Soda Cans: as the price goes down individuals are willing to purchase more units
- Both of the above: As the price of cans goes down more people buy sodas and some buyers buy more units as well.
Causes for a shift in the supply curve
- Input prices
- Technology
- Number and scale of sellers
- Sellers’ expectations about the future
Why does the supply curve have a positive slope?
- Extensive margin: as the price for a smartphone goes up the number of students willing to sell theirs increases (each seller sells at most one unit)
- Intensive margin: as the price for a smartphone goes up the producers each produce and sell more units
- Both of the above: When the price goes up more competitors enter the market and certain sellers sell more units.
Formula Price Elasticity of Demand / Supply
The variable b is taken from the curve: Q = a-bP
Terminology: Elastic
If the elasticity is greater than 1, then demand is said to be elastic (ex: olive oil --> many alternatives). If the elasticity is infinite, then demand is perfectly elastic.
Terminology: Inelastic
If the elasticity is smaller than 1, then demand is said to be inelastic (ex: cigarettes --> addictive product). If the elasticity is zero, then demand is perfectly inelastic.
Terminology: unit-elastic
If the elasticity is equal to 1, then demand is said to be unit-elastic.
Effects of changing prices depending on the price elasticity.
Equation to calculate price at which the most revenue can be gained.
\(P=\frac{a}{2b}\)
The variables are taken from the curve: Q = a-bP
Formula Cross-price Elasticity
\(Cross\ price\ elasticity=\frac{Percentage\ change\ in\ quantity\ demanded\ of\ good\ x}{Percentage\ change\ in\ price\ of\ good\ y}\)
Interpretation of cross-price elasticity
Formula Income Elasticity
\(Income\ elasticity=\frac{Percentage\ change\ in\ quantity\ demanded}{Percentage\ change\ in\ income}\)
Interpretation of income elasticity
Three Engel Laws
- Expenditure share of food products falls as income rises.
- Expenditure share of clothing, lighting, heating and housing is independent of income.
- Expenditure shares on education, health and leisure increases as incomes rise.
Factors influencing the elasticity of supply
Elasticity of supply will be greater:
- The more inventory the firm has
- The more easily the firm can hire workers
- The longer the time horizon
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Causes for a shift of the demand curve
- Tastes and preferences
- Income and wealth
- Availability and prices of related goods
- Buyer’s expectations of the future
Why does the demand curve have a negative slope?
- Extensive margin: Newspapers: as the price goes down the number of people willing to purchase a newspaper increases (each buyer buys at most one unit).
- Intensive margin: Soda Cans: as the price goes down individuals are willing to purchase more units
- Both of the above: As the price of cans goes down more people buy sodas and some buyers buy more units as well.
Causes for a shift in the supply curve
- Input prices
- Technology
- Number and scale of sellers
- Sellers’ expectations about the future
Why does the supply curve have a positive slope?
- Extensive margin: as the price for a smartphone goes up the number of students willing to sell theirs increases (each seller sells at most one unit)
- Intensive margin: as the price for a smartphone goes up the producers each produce and sell more units
- Both of the above: When the price goes up more competitors enter the market and certain sellers sell more units.
Formula Price Elasticity of Demand / Supply
The variable b is taken from the curve: Q = a-bP
Terminology: Elastic
If the elasticity is greater than 1, then demand is said to be elastic (ex: olive oil --> many alternatives). If the elasticity is infinite, then demand is perfectly elastic.
Terminology: Inelastic
If the elasticity is smaller than 1, then demand is said to be inelastic (ex: cigarettes --> addictive product). If the elasticity is zero, then demand is perfectly inelastic.
Terminology: unit-elastic
If the elasticity is equal to 1, then demand is said to be unit-elastic.
Effects of changing prices depending on the price elasticity.
Equation to calculate price at which the most revenue can be gained.
\(P=\frac{a}{2b}\)
The variables are taken from the curve: Q = a-bP
Formula Cross-price Elasticity
\(Cross\ price\ elasticity=\frac{Percentage\ change\ in\ quantity\ demanded\ of\ good\ x}{Percentage\ change\ in\ price\ of\ good\ y}\)
Interpretation of cross-price elasticity
Formula Income Elasticity
\(Income\ elasticity=\frac{Percentage\ change\ in\ quantity\ demanded}{Percentage\ change\ in\ income}\)
Interpretation of income elasticity
Three Engel Laws
- Expenditure share of food products falls as income rises.
- Expenditure share of clothing, lighting, heating and housing is independent of income.
- Expenditure shares on education, health and leisure increases as incomes rise.
Factors influencing the elasticity of supply
Elasticity of supply will be greater:
- The more inventory the firm has
- The more easily the firm can hire workers
- The longer the time horizon
