Outline for Lecture 6
Price Elasticity of Supply
How do we define price elasticity of supply?
The Price Elasticity Coefficient and Formula
How do we measure price elasticity of supply? What is in the numerator of elasticity equation? What is in the denominator?
In elasticity calculations, we use the midpoint formula to determine percentage changes.
According to midpoint formula, how do we measure percentage change in quantity supplied? How do we measure percentage change in price?
Interpretation of Es
If price elasticity of supply for a commodity is _____ 1, supply is elastic. What does elastic supply indicate in terms of how responsive producers are to price changes?
If price elasticity of supply for a commodity is _____ 1, supply is unit-elastic.
If price elasticity of supply for a commodity is _____ 1, supply is inelastic. What does inelastic supply indicate in terms of how responsive producers are to price changes?
Numerical Example
Following textbook, suppose that an increase in the price of a commodity from $4 to $6 raises quantity supplied from 10 to 14 units. What is price elasticity of supply for this section of supply curve? Is supply elastic, unit-elastic, or inelastic?
Next, suppose that price of the commodity rises further from $6 to $8, which raises quantity supplied from 14 to 18 units. What is price elasticity of supply for this second section of supply curve? Is supply elastic, unit-elastic, or inelastic?
Finally, suppose that an additional increase in price of the commodity from $8 to $10 raises quantity supplied from 18 to 22 units. What is price elasticity of supply for this third section of supply curve? Is supply elastic, unit-elastic, or inelastic?
Based on your calculations, is price elasticity of supply on a given supply curve (Lecture 6) more or less volatile than price elasticity of demand on a given demand curve (Lecture 5)?
Determinant of Price Elasticity of Supply
Unlike price elasticity of demand that has several determinants, there is only one factor that affects price elasticity of supply: ease of shifting resources (physical capital, labor, raw materials, etc.) from production of one commodity to another.
Suppose that a firm producestwo goods, basketballs and footballs, and that price of footballsrises, prompting the firm to produce more footballs and fewer basketballs.
Suppose further that the firm may operate in two different states of the world: in first state, footballs and basketballs are produced in the same factory and resources can be moved from basketball line to football line immediately; in second state, footballs and basketballs are produced in different factories and the firm has to move resources from basketball plant to football plant, which will take time.
We conclude as follows: the easier (the less time-consuming) it is for the firm to move resources from basketball to football production, the more _____ is the supply of footballs. Explain why.
Outline for Lecture 7
Cross Elasticity and Income Elasticity of Demand
Cross Elasticity of Demand
How do we define cross elasticity of demand?
How do we measure cross elasticity of demand? What is in the numerator of elasticity equation? What is in the denominator?
In elasticity calculations, we use the midpoint formula to determine percentage changes.
According to midpoint formula, how do we measure percentage changes in numerator and denominator of cross elasticity formula?
Interpretation
Cross elasticity of demand can be positive or negative depending on whether two commodities are substitutes or complements.
Substitute Goods
Consider Pepsi and Coke.
Suppose that price of a can of Pepsi rises from $1 to $2. As a result, consumers switch from Pepsi to Coke, raising quantity of Coke demanded from 10 to 15 cans.
What is cross elasticity of demand between Pepsi and Coke? Is it positive or negative? Explain what the sign indicates in terms of how consumers respond to changes in price of Pepsi.
Complementary Goods
Consider coffee and sugar.
Suppose that price of a pack of ground coffee rises from $4 to $6, which leaves consumers with less money to spend on sugar. As a result, quantity of sugar demanded falls from 4 to 2 packs.
What is cross elasticity of demand between coffee and sugar? Is it positive or negative? Explain what the sign indicates in terms of how consumers respond to changes in price of coffee.
Income Elasticity of Demand
How do we define income elasticity of demand?
How do we measure income elasticity of demand? What is in the numerator of elasticity equation? What is in the denominator?
In elasticity calculations, we use the midpoint formula to determine percentage changes.
According to midpoint formula, how do we measure percentage change in quantity demanded? How do we measure percentage change in income?
Interpretation
Income elasticity of demand can be positive or negative depending on whether the commodity is a normal good or an inferior good.
Normal Goods
Consider restaurant meals.
Suppose that when income rises from $100 to $200, quantity of restaurant meals demanded increases from 2 to 5 mealsper week.
What is income elasticity of demand for restaurant meals? Is it positive or negative? Explain what the sign indicates in terms of how consumers of restaurant meals respond to income changes.
Inferior Goods
Consider Ramen noodles.
Suppose that when income rises from $200 to $400, quantity of Ramen noodles demanded falls from 20 to 5 packsper week.
What is income elasticity of demand for Ramen noodles? Is it positive or negative? Explain what the sign indicates in terms of how consumers of Ramen noodlesrespond to income changes.
Outline for Lecture 8
Law of Diminishing Marginal Utility
How we define the law of diminishing marginal utility?
Provide an example and describe how utility we receive from additional units of a product changes aswe consume more of that product.
Terminology
How do we define utility?
Is utility objective or subjective; is utility derived from a particular commodity constant, or does it vary by individual? Explain with an example.
Total Utility
Figure 7.1 and accompanying table present data on total utility and marginal utility received from consuming tacos.
How do we define total utility?
What is total utility consumer gets from eating one taco? How about two tacos? Report total utilities for remaining quantities: three, four, five, six, and seven tacos.
What type of trend do we see in total utility figures?
Marginal Utility
How do we define marginal utility? Explain how marginal utility is related to total utility.
What is marginal utility of the first taco? How about the second taco? Report marginal utilities for remaining quantities: third, fourth, fifth, sixth, and seventh tacos.
What type of trend do we see in marginal utility figures? Is this trend consistent with the law of diminishing marginal utility? Explain.
Outline for Lecture 9
Theory of Consumer Behavior
Utility-Maximizing Rule
According to utility-maximizing rule, how should a consumer allocate limited income across different products?
Numerical Example
For a numerical example, suppose that consumer has $10 of income and buys only two goods (apples at $1 and oranges at$2) as shown by Table 7.1.
How do we define marginal utility per dollar? Explain the difference between marginal utility and marginal utilityper dollar?
Given marginal utilities (from columns 2a and 3a) and product prices, what are per-dollar marginal utilities for apples and oranges for units one through seven?
We now go through utility maximization process.
Step 1
Consumer compares per-dollar marginal utility of first apple, ____ units, to per-dollar marginal utility of first orange, ____ units. Because first ____ yields greater per-dollar utility than first ____, consumer buys ____.
At the end of step 1, consumer has ____ in his consumption basket and income falls to ____.
Step 2
Consumer compares per-dollar marginal utility of ____ apple, ____ units, to per-dollar marginal utility of ____ orange, ____ units. Because ____ yields the same per-dollar utility as ____, consumer buys ____.
At the end of step 2, consumer has ____ in his consumption basket and income falls to ____.
Step 3
Consumer compares per-dollar marginal utility of ____ apple, ____ units, to per-dollar marginal utility of ____ orange, ____ units. Because ____ yields greater per-dollar utility than ____, consumer buys ____.
At the end of step 3, consumer has ____ in his consumption basket and income falls to ____.
Step 4
Consumer compares per-dollar marginal utility of ____ apple, ____ units, to per-dollar marginal utility of ____ orange, ____ units. Because ____ yields the same per-dollar utility as ____, consumer buys ____.
At the end of step 4, consumer has ____ in his consumption basket and exhausts his income.
At this point, you may refer to Table 7.2 to confirm your work.
Is final consumption basket consistent with utility-maximizing rule: are per-dollar marginal utilities equal for last apple and last orange purchased?
Based on marginal utility figures reported in columns 2a and 3a, what is total utility consumer receives from this basket? Is this the highest possible utility with $10 of income? Explain.
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