Elasticity Of Demand & Supply – . Equilibrium (MKM C7/160-2; 149-51; 156-158) Equilibrium is a condition where, without changing one variable, the time achieved will last forever (
). In markets, the equilibrium price “clears” the market, meaning that the quantity demanded by consumers equals the quantity supplied by producers. In general, economic theory recognizes four types of equilibrium:
Elasticity Of Demand & Supply
: a condition that exists in all economies where all industries are perfectly competitive. It is a static state where all prices are at the lowest long-run average price that maximizes individual satisfaction, demand and supply of factors of production (capital, labor, natural resources), and is in equilibrium with all factors. opportunity cost
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Ii is a stable equilibrium: the condition reached continues indefinitely as the variable changes, after which equilibrium is restored. Example: A ball on the bottom of a cup; shake, stop and the ball will return to the bottom;
Iii) Unstable Equilibrium: A condition once reached persists indefinitely with a change in the variable and then equilibrium is restored. Example: A ball is resting on top of an inverted bowl – shake it and the ball will fall to prevent it from coming back; and,
Iv – Multiple Equilibrium: A condition that exists in all economies that have multiple points of stable equilibrium, but is optimal in terms of economic growth.
The sensitivity of one variable to changes in another variable. Unlike the constant slope of the straight line when ΔY/ΔX is measured or raised across the run, elasticity varies even along the straight line (P&B 7 Figure 4.4).
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). It is measured as (ΔY2-Y1/Y1)/(ΔX2-X1/X1), that is, the change in Y divided by the change in X. Economic theory recognizes three main types of elasticity:
I is the income elasticity, the change in demand due to changes in income if price is held constant
Ii – Price elasticity is the change in demand or supply caused by a change in price (P&B Vol. 4. 5.8; Fig. 7 Fig. 4.3; R&L Fig. 13. 4-2 and 4-3, MKM Fig. 5.1 , b, c & d) or supply (P&B Fig. 7.4.8; R&L Fig. 13 4-6, MKM Fig. 5.5 a, b, c, d & e, MKM Fig. 5.6).
Or a) a change in the demand for a factor of production (capital) due to a change in the price of another factor (labour); or b) a change in demand for one good (burgers) due to a change in the price of a competing or substitute good (pizza).
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Greater than one (elastic) is a horizontal demand or supply curve where a small increase in price causes a large change in demand or supply;
Less than one (inelastic) is a vertical demand or supply curve where large changes in price cause little change. We begin by analyzing a real example of the air travel industry and take a closer look at how airline ticket prices work. revenue from ticket sales. Common sense might lead you to believe that a decrease in the price of an airplane ticket means an increase in income, and vice versa. In economics, such a specific ratio of unit costs and income is called
We will learn later. Canada’s fledgling airlines, in particular, can break even more easily under these conditions. Finance Canada investigated these relationships and published research results in Air Travel Elasticities: Concepts, Issues and Assessment: 1, distinguishing six types of air travel associated with each pair: business and leisure, long-haul and short-haul. international long-haul and North American long-haul Research results show that demand for business air travel is less elastic than for leisure. Such a discovery is not surprising, because even an expensively booked vacation can be moved to different dates more easily than a business trip. Two other findings of the study are that the demand for long-haul flights is less elastic than for short-haul flights, and that the demand for international flights is less elastic than for flights within North America. This makes sense because the further away you are, the less likely you are to find an alternative mode of transportation that can replace an expensive flight.
We now have a mathematical model that helps us analyze and define the unit cost/revenue ratio
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To facilitate the analysis, it will be more convenient to write the demand function in the form (f)(q = f(p)text), in other words, we will think about the quantity demanded ((q ) as a function of the unit price of a certain product (ptext) As shown in Figure 5.1, the function (f) is generally a decreasing function of (ptext) because the quantity demanded at the price of the good generally decreases as the associated unit price increases.
In solving the problem, it is easier to use the inverse function (ftext) than (p=g(q)) itself.
Figure 5.1 The demand function (q = f(p)) and the price of this demand (h) are increasing in dollars.
We now take a similar approach to the generation analysis in Chapter 4, and Figure 5.1 shows the increase in (h) $ unit price (p) for a given product (p+). h) dollars. Therefore, the associated number must be changed from (f(p)) units to (f(p + h)) units, with a total decrease of (f(p + h)-f(p)) units. . Now we can calculate the percentage change in unit price
Demand & Supply
By calculating the ratio of the percentage change in quantity demanded to the percentage change in price, we can determine the effect of the latter on the former:
Now we recognize the difference factor of this fraction. Thus, if (f) varies with (ptext), we can conclude that for small (h)
In Section 5.7, the decreasing function (q = f(p)) in a certain interval (Itext) its derivative (f'(p)lt 0) will appear in (p) Itext) But this means that (pf'(p)/f(p)) is negative. Since it is better to work with positive values, economists define the elasticity of demand (E(p)) as a negative number (pf'(p)/f(p)text)
The unit price (p) in dollars and the quantity demanded of a particular product are related by Eq.
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In Example 5.2, we found that the demand for a certain product is elastic when (p = 300) and inelastic when (p = 100text). These calculations indicate that there will be a small percentage change in unit price. a larger percentage change in quantity demanded, i.e. when demand is elastic; and a small percentage change in unit price will result in a smaller percentage change in quantity demanded, that is, when demand is inelastic; and finally, a small percentage change in unit price will cause the same percentage change in quantity demanded, that is, when demand is unitary.
In the previous chapter, we developed the concept of elasticity of demand by analyzing the relationship between quantity demanded and unit price. Of course, this change affects income, so we now look more closely at the effect of elasticity on income. Again, we assume that (q = f(p)) relates the quantity demanded of a given product to its unit price (p) dollars. When (q) units of product are sold at a price of (ptext), revenue is earned
This last equation tells us that elasticity affects income. To determine what the effect is, we analyze the sign of marginal revenue. We first note that (f(p)) is positive for all values of (p) and consider three cases:
Figure 5.2 Inelastic demand corresponds to an increase in income (grey black), inelastic demand corresponds to a decrease in income (see white), and unit demand is constant income (see arrows)
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By looking at the unit cost-revenue ratio below, you can better remember the impact of changes in unit cost on revenue.
Where (p) denotes the unit price in dollars and (q) the quantity demanded. This is a function of the weekly total price associated with the product
For each demand equation, calculate the elasticity of demand and determine whether demand is elastic, unitary, or inelastic at the given price, (ptext)
Where (q) is the quantity demanded in hundreds of units and (p) is the price per unit in dollars.
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It is assumed that the number of purchased fair tickets (q) and the ticket price (p) are related by the demand equation.
Where (p) is the unit price in hundreds of dollars and (q) is the quantity demanded per week. Learn about the definition and importance of the circular flow model in economics and how it applies in real life. Understand and use circular flow diagram and diagram. Updated: 2021-11-09
The four main parts of a circular flow diagram are individuals, firms, markets for goods and services, and markets for factors of production. These four parts are the foundation of understanding