# ECON 101 Tutorial Week 2: Demand Elasticity Calculation  This tutorial focuses on solving for the price elasticity of demand of good A using a given demand function, and analyzing the elasticity status.

• Uploaded on | 0 Views
• aana

## About ECON 101 Tutorial Week 2: Demand Elasticity Calculation

PowerPoint presentation about 'ECON 101 Tutorial Week 2: Demand Elasticity Calculation'. This presentation describes the topic on This tutorial focuses on solving for the price elasticity of demand of good A using a given demand function, and analyzing the elasticity status.. The key topics included in this slideshow are ECON 101, tutorial, demand elasticity, demand function, price elasticity of demand,. Download this presentation absolutely free.

## Presentation Transcript

1. ECON 101 Tutorial: Week 2 Shane Murphy s.murphy5@lancaster.ac.uk Office Hours: Monday 3:00-4:00 LUMS C86

2. Outline Substitute Lecturer Next Week Roll Call Class Rep Problems Discussion

3. Class Rep

4. Exercise Consider the following demand function: Q A =100- 8P A +0.5P B +2Y, where Q A is the quantity demanded of good A, P A is the price of good A, P B is the price of good B and Y is the income. a) If P A =7, P B =12 and Y=4.5 calculate the price elasticity of demand of good A. Is the demand elastic or inelastic? First, let us solve for Q A Q A = 100 - 8P A + 0.5P B + 2Y = 100 8 (7) + 0.5 (12) + 2 (4.5) = 100 56 + 6 + 9 = 59

5. Exercise Consider the following demand function: Q A =100- 8P A +0.5P B +2Y, where Q A is the quantity demanded of good A, P A is the price of good A, P B is the price of good B and Y is the income. a) If P A =7, P B =12 and Y=4.5 calculate the price elasticity of demand of good A. Is the demand elastic or inelastic?

6. Exercise a) If P A =7, P B =12, Y=4.5 and Q A = 59, and Q A =100- 8P A +0.5P B +2Y calculate the price elasticity of demand of good A. Is the demand elastic or inelastic? Ped = dQ A /dP A * P A /Q A dQ A /dP A = -8 ped = dQ A /dP A * P A /Q A = -8 * 7/59 = -56/59 By convention, we write ped = 56/59 (positive) Elasticity of Demand is Inelastic (ped<1)

7. Exercise b) If P A =7, P B =12, Y=4.5 and Q A = 59, and Q A =100- 8P A +0.5P B +2Y calculate the calculate the income elasticity. What kind of good is A? (Normal/Inferior? If normal then necessity or luxury?) ied = dQ A /dY * Y/Q A dQ A /dY = 2 ied = dQ A /dY * Y/Q A = 2 * 4.5/59 = 9/59 This is a normal good (ied>0) This is a necessity (0

8. Exercise c) If P A =7, P B =12, Y=4.5 and Q A = 59, and Q A =100- 8P A +0.5P B +2Y calculate the cross price elasticity. What kind of goods are A and B? (Complements or substitutes?) cped = dQ A /dP B * P B /Q A dQ A /dP B = 0.5 cped = dQ A /dP B * P B /Q A = 0.5 * 12/59 = 6/59 These goods are substitutes (cped > 0)

9. Exercise 5 Suppose that your demand Schedule for DVDs is as follows: a) Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from 8 to 10 for income of 10,000 and income of 12,000. Income of 10,000: ped = [(Q A Q B )/([Q A + Q B ]/2)/[(P A P B )/([P A + P B ]/2) = [(40 32)/([40 + 32]/2)/[(8 10)/([8 + 10]/2) = (8/36)/(-2/9) = -4/4 = -1 Price Quantity Demanded (Y = 10,000) Quantity Demanded (Y = 12,000) 8 40 50 10 32 45 12 24 30 14 16 20 16 8 12

10. Exercise 5 Suppose that your demand Schedule for DVDs is as follows: a) Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from 8 to 10 for income of 10,000 and income of 12,000. Income of 12,000: ped = [(Q A Q B )/([Q A + Q B ]/2)/[(P A P B )/([P A + P B ]/2) = [(50 45)/([50 + 45]/2)/[(8 10)/([8 + 10]/2) = (5/47.5)/(-2/9) = -45/95 = -0.47 Price Quantity Demanded (Y = 10,000) Quantity Demanded (Y = 12,000) 8 40 50 10 32 45 12 24 30 14 16 20 16 8 12

11. Exercise 5 Suppose that your demand Schedule for DVDs is as follows: b) Use the midpoint method to calculate your income elasticity of demand as your income increases from 10,000 to 12,000 for price of 12 and price of 16. Price of 12: ied = [(Q A Q B )/([Q A + Q B ]/2)/[(Y A Y B )/([Y A + Y B ]/2) = [(24 30)/([24 + 30]/2)/ [(10,000 12,000)/([10 ,000+ 12,000]/2) = (-6/27)/(-2/11) = 66/54 = 1.22 Price Quantity Demanded (Y = 10,000) Quantity Demanded (Y = 12,000) 8 40 50 10 32 45 12 24 30 14 16 20 16 8 12

12. Exercise 5 Suppose that your demand Schedule for DVDs is as follows: b) Use the midpoint method to calculate your income elasticity of demand as your income increases from 10,000 to 12,000 for price of 12 and price of 16. Price of 16: ied = [(Q A Q B )/([Q A + Q B ]/2)/[(Y A Y B )/([Y A + Y B ]/2) = [(8 12)/([8 + 12]/2)/ [(10,000 12,000)/([10 ,000+ 12,000]/2) = (-4/10)/(-2/11) = 44/20 = 2.2 Price Quantity Demanded (Y = 10,000) Quantity Demanded (Y = 12,000) 8 40 50 10 32 45 12 24 30 14 16 20 16 8 12

13. Exercise 7 Consider public policy aimed at smoking a) Studies indicate the ped for cigarettes is about 0.4. If a packed of cigarettes is currently priced at 6 and the government wants to reduce smoking by 20%, by how much should it increase the price? b) If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? c) Studies also find that teenagers have a higher price elasticity of demand for cigarettes than do adults. Why might this be true? a) ped = % change in Q/% change in P 0.4 = -0.2/% change in P % change in P = -0.2/0.4 = -1/2 price should increase by 50 percent (4 using the midpoint method) b) Goods tend to be more elastic over longer time horizons, so the policy will have a smaller effect in the short run than the long run

14. Exercise 7 Consider public policy aimed at smoking a) Studies indicate the ped for cigarettes is about 0.4. If a packed of cigarettes is currently priced at 6 and the government wants to reduce smoking by 20%, by how much should it increase the price? b) If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? c) Studies also find that teenagers have a higher price elasticity of demand for cigarettes than do adults. Why might this be true? c) ped might be a function of income as income increases, elasticity falls ped might be a function of age as people get older, they are less flexible, and have more inelastic demand functions ped might be a function of the experiences of the consumer Older smokers might be more addicted and less elastic to price changes Older smokers might have a taste for fewer substitutes for smoking