Review of Demand

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
Q/yr
0
2
1
4
Demand

• Elasticity of Demand
• Own price elasticity of demand
• Change in Q Y / Change in P Y
• E ?QY / ?PY
• 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
Demand

• Elasticity of Demand
• Domestic demand
• Export demand
• Why more elastic?

6
Demand

• Other Elasticity Measures
• Cross price elasticity of demand
• ?QY / ?PX
• Substitutes
• Complements
• Income elasticity of demand
• ?QY / ?I
• Normal Goods
• Inferior Goods

7
Demand

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

8
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
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
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
  1Ed(PriceYnewPriceYold) / PriceYold
• If E(Qx,Py) 0.15
• Calculate Qt Demanded

10
11
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
  1Ed(PriceYnewPriceYold) / 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
  (IncomenewIncomeold) / Incomeold
• If E(Qx,Inc) 0.2
• Calculate Qt Demanded

Income
Dx wrt Income
26,000
25,000
600mbu
Qx