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Review of Demand

Review of Demand. Economics – allocation of scarce resources to the unlimited wants of people Demand is a schedule of the maximum quantity consumed at alternative prices. $. D. Q/yr. Demand. Change in Demand What changes (shifts) demand? Income (1-3% growth annually)

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Review of Demand

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  1. Review of Demand • Economics – allocation of scarce resources to the unlimited wants of people • Demand is a schedule of the maximum quantity consumed at alternative prices $ D Q/yr

  2. Demand • Change in Demand • What changes (shifts) demand? • Income (1-3% growth annually) • Population (1-2% growth annually) • Prices of other goods • Tastes & preferences $ D 2 D 0 D1 Q/yr

  3. Demand • Change in quantity demanded • Change in quantity demanded occurs due to change in own price $ P 0 P 1 1 P 2 D q q Q/yr q 0 2 1

  4. Demand • Elasticity of Demand • Own price elasticity of demand • %Change in Q Y / %Change in P Y • E = %ΔQY / % ΔPY • How do you interpret E = -0.25 • What is Inelastic (Insulin) • What is Elastic (Vacation Cruises) • Factors that influence Elasticity • Necessity • Availability of Substitutes

  5. $ -.60 -1.14 TD DD Q/yr. Demand • Elasticity of Demand • Domestic demand • Export demand • Why more elastic?

  6. Demand • Other Elasticity Measures • Cross price elasticity of demand %ΔQY / % ΔPX • Substitutes • Complements • Income elasticity of demand %ΔQY / % ΔI • Normal Goods • Inferior Goods

  7. Demand • The limits of Elasticity Measures • Difficult to measure demand • Difficult to sort out cause/effect

  8. Ed = -0.25 Ed = -1.25 5 5 D 4.5 4.5 D Qx 8.0 Qx ? 8.0 ? Demand • Why are measures of elasticity important • Predict Policy Impacts • Revenue impact Px Px -0.25 = %∆QY / %∆PY -0.25 = %∆QY / -10 2.5 = %∆QY 8 * 1.025 = 8.2 -1.25 = %∆QY / %∆PY -1.25 = %∆QY / -10 12.5 = %∆QY 8 * 1.125 = 9.0

  9. Px D Qx Demand • Own Price elasticity of demand (Ed) for policy analysis New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Own Price) Or New Qt Y Demanded = Old Qt Y Dem. * [1+ Ed * (Price Ynew – Price Yold) / Price Yold] If E(Qy,Py) = -.25 Calculate Qt Demanded P Old 5 P New 4.5 8.0 Qold ?

  10. Py Dx wrt Py 6 5 Qx Demand • Cross Price elasticity of demand (Ed) for policy analysis -- Substitutes New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Price for Other Commodity) Or New Qt X Demand = Old Qt X Demand *[1+Ed*(PriceYnew–PriceYold) / PriceYold] If E(Qx,Py) = 0.15 Calculate Qt Demanded 10

  11. Py D Qx Demand • Cross Price elasticity of demand (Ed) for policy analysis -- Complements New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Price for Other Commodity) OR New Qt X Demand = Old Qt X Demand *[1+Ed*(PriceYnew–PriceYold) / PriceYold] If E(Qx,Py) = -0.15 Calculate Qt Demanded 6 5 10

  12. Demand • Income elasticity of demand (Ed) for policy analysis New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Income) Or write it as: New Qt Demanded = Old Qt Demanded * [1+ Ed * (Incomenew–Incomeold) / Incomeold] If E(Qx,Inc) = 0.2 Calculate Qt Demanded Income Dx wrt Income 26,000 25,000 600mbu Qx

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