Lecture 1 Basics of Economics Elasticity Dr Rajeev

  • Slides: 74
Download presentation
Lecture 1 Basics of Economics & Elasticity Dr. Rajeev Dhawan Director Given to the

Lecture 1 Basics of Economics & Elasticity Dr. Rajeev Dhawan Director Given to the EMBA 8400 Class January 4, 2008

Course Objective & Teaching Philosophy ¨Practical Course to Comprehend the Economic Environment so that

Course Objective & Teaching Philosophy ¨Practical Course to Comprehend the Economic Environment so that Managers can make their Decisions ¨Philosophy is that Micro Sectors Add Up to a Macro Environment ¨Optimal Blend of Economics and Real World Experience/Common Sense ¨Train You to Critically Evaluate and Interpret Business Press Writings

Course Layout ¨ First Week (1&2) - Basic Microeconomics ¨ Second Week (3&4) –

Course Layout ¨ First Week (1&2) - Basic Microeconomics ¨ Second Week (3&4) – Basics of Macroeconomics and Basic Workings of an Economy with the Help of a “Basic” Macromodel that can Perform Real-Life Fiscal And Monetary Experiments ¨ Third Week (5&6) – Wrap up with Model Training and Group Project Presentations ¨ Field Trip to the Economic Forecasting Conference on Feb. 27 th BONUS)

Background Articles ¨ My Economics ¨ Why Journalists Can't Add ¨ Where Presidents Have

Background Articles ¨ My Economics ¨ Why Journalists Can't Add ¨ Where Presidents Have No Power ¨ Their Money Our Strength ¨ How to Stop Relatives from Bragging About their Big Profits in Real Estate ¨ Economic Hypochondria

Grading Policy ¨ 50% 2 Quizzes in Class ¨ 25% Group Presentations on a

Grading Policy ¨ 50% 2 Quizzes in Class ¨ 25% Group Presentations on a Selected Industry ¨ 25% Take Home Final Exam – Macroeconomic Model Exercise 25% Bonus - Economic Forecasting Conference

Group Presentations The objectives of this group project are : 1. To help you

Group Presentations The objectives of this group project are : 1. To help you bridge the gap between the economic theory and models discussed in class and the “real world” 2. To confront the problems of trying to find data which are appropriate for the questions under consideration and to deal with the problems of incomplete information 3. To showcase your oral and written communication skills 4. To identify how the problems faced and the decisions made by other firms are similar to your own.

Suggested Industries 1. Wireless Communication 2. Networking & Security Systems 3. Oil Industry 4.

Suggested Industries 1. Wireless Communication 2. Networking & Security Systems 3. Oil Industry 4. Healthcare Industry 5. Hospitality Industry 6. Paper & Pulp Industry 7. Utility & Power Industry 8. Consumer Products 9. Insurance 10. REIT (Real Estate Investment Trust)

Macro Framework ¨Households: Consume & Work ¨Firms: Production & Investment ¨Government: Money Supply, Taxes,

Macro Framework ¨Households: Consume & Work ¨Firms: Production & Investment ¨Government: Money Supply, Taxes, Expenditures ¨Foreign Sector: Exports, Imports & Exchange Rate

Macroeconomic Model For Teaching ¨ ¨ ¨ ¨ Section 1: A Model Simulation Approach

Macroeconomic Model For Teaching ¨ ¨ ¨ ¨ Section 1: A Model Simulation Approach to Macroeconomics Section 2: Classification of Equations Section 3: Glossary of Variables Section 4: Listing of Equations in the Integrated Macro Model Section 5: Flow Diagram of Integrated Macro Model Section 6: Policy Experiments with Integrated Macro Model Section 7: Guidelines to Use the Model

GLOSSARY OF VARIABLES Variable Meaning Units C Consumption Billions of $ EX Exports Billions

GLOSSARY OF VARIABLES Variable Meaning Units C Consumption Billions of $ EX Exports Billions of $ EXCH Exchange Rate Index G Government Purchases Billions of $ GDP Gross Domestic Product Billions of $ [email protected] L GDP @ Full Employment Billions of $ [email protected] W GDP in Rest of the World Billions of $ I Investment Billions of $ IM Imports Billions of $ M Money supply Billions of $ NETEX Net Exports Billions of $ P Price Level Index P% Inflation Percent [email protected] Price Level, Rest of the World Index R Real Interest Rate Percent [email protected] Real Interest Rate, Rest of the World Percent T Tax Revenues Billions of $ TAX% Tax Rate Fraction YDP Disposable Income Billions of $

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP CONSUMPTION tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK EXPECTED INFLATION UNEMPLOYMENT POTENTIAL GDP labor force

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP CONSUMPTION tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK EXPECTED INFLATION UNEMPLOYMENT POTENTIAL GDP labor force

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP CONSUMPTION tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK EXPECTED INFLATION UNEMPLOYMENT POTENTIAL GDP labor force

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS

~Typical Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP CONSUMPTION tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK EXPECTED INFLATION UNEMPLOYMENT POTENTIAL GDP labor force

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP Tech/Profit Opportunities EXPECTED INFLATION STOCK MARKET CONSUMPTION tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK UNEMPLOYMENT POTENTIAL GDP labor force

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP Tech/Profit Opportunities EXPECTED INFLATION STOCK MARKET CONSUMPTION EUPHORIA tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK UNEMPLOYMENT POTENTIAL GDP labor force

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP Tech/Profit Opportunities EXPECTED INFLATION STOCK MARKET CONSUMPTION EUPHORIA tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK UNEMPLOYMENT POTENTIAL GDP labor force

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1

~”New Economy” Macro-Model~ world interest rate world price world GDP price level lag 1 IMPORTS inflation lag 1 EXPORTS EXCHANGE RATE NET EXPORTS money PRICE LEVEL INTEREST RATE INFLATION government INVESTMENT REAL GDP Tech/Profit Opportunities EXPECTED INFLATION STOCK MARKET CONSUMPTION EUPHORIA tax rate capital stock lag 1 TAX REVENUES investment lag 1 DISPOSABLE INCOME CAPITAL STOCK UNEMPLOYMENT POTENTIAL GDP labor force

Field Trip to the Forecasting Center’s Quarterly Forecast th Conference on Feb. 27 !

Field Trip to the Forecasting Center’s Quarterly Forecast th Conference on Feb. 27 !

The Economic Forecasting Center at Georgia State University collects and analyzes macroeconomic data and

The Economic Forecasting Center at Georgia State University collects and analyzes macroeconomic data and develops procedures to forecast the national, regional and local economies. http: //robinson. gsu. edu/efc/index. html

What Products Do We Offer? ¨The Center offers: – Forecast Reports ¨Georgia and Atlanta

What Products Do We Offer? ¨The Center offers: – Forecast Reports ¨Georgia and Atlanta (Quarterly) ¨Nation (Quarterly) ¨Southeast Indicators (Bi-Annual) – Quarterly Conferences – Sponsorships – Custom Consulting Services

Quarterly Conferences ¨ Consortium of GSU Experts and Business Executives ¨ My Forecast Talk!

Quarterly Conferences ¨ Consortium of GSU Experts and Business Executives ¨ My Forecast Talk! ¨ 4 Industry Speakers ¨ Forecast Reports ¨ Networking Breakfast, Refreshments and Lunch

How to Attend Our Conferences? v It Costs Money! v$150 per Person v Institutional

How to Attend Our Conferences? v It Costs Money! v$150 per Person v Institutional Discounts Available. v BUT MY STUDENTS ARE IN FOR FREE! v Check Our Website for Latest Program: www. robinson. gsu. edu/efc

Introduction The 10 Principles of Economics

Introduction The 10 Principles of Economics

What is Economics? ¨ Economics is the study of how we use our scarce

What is Economics? ¨ Economics is the study of how we use our scarce productive resources for consumption, now or in future. – Paul Samuelson ¨ Resources are scarce: – Society has limited resources and therefore cannot produce all the goods and services people wish to have – Example: clean air & water – Scarcity is not poverty

Basic Questions ¨ What to produce in what quantity? ¨ How to produce them?

Basic Questions ¨ What to produce in what quantity? ¨ How to produce them? ¨ When and where to produce? ¨ For whom? ¨ Who makes economic decisions and by what process?

Basic Concepts ¨ Opportunity Cost: Things are Scarce – Next Best Alternative ¨Ex: Party

Basic Concepts ¨ Opportunity Cost: Things are Scarce – Next Best Alternative ¨Ex: Party on Friday night vs. study for exams – Cost of Time ¨Ex: 1 hour wait time at the dentist

Basic Concepts ¨ Marginal Concept: At the Margin ¨Utility: Level of Satisfaction (here, drunkenness)

Basic Concepts ¨ Marginal Concept: At the Margin ¨Utility: Level of Satisfaction (here, drunkenness)

Basic Concepts ¨ Sunk/Fixed Costs: Expenditures Made that Cannot be Recovered – Example: ¨You

Basic Concepts ¨ Sunk/Fixed Costs: Expenditures Made that Cannot be Recovered – Example: ¨You bought a computer laptop for $1500 ¨A newer, upgraded model costs $1200 ¨The dealer will accept a trade in + $400 ¨What do you do?

Winnick’s Voyage to the Bottom of the Sea WSJ; by Andy Kessler ¨ First

Winnick’s Voyage to the Bottom of the Sea WSJ; by Andy Kessler ¨ First Mover, FCC regulated + fixed costs Ø Regulated utility Ø Price protection ØYou can’t lose Ø Traffic / use was of low economic value or cashless Ø Global Crossing couldn't cut prices without running the risk of either failing to cover its debt or being unable to raise more capital Ø Accounting Tricks…….

10 Principles of Economics 1. People face tradeoffs : • “No such thing as

10 Principles of Economics 1. People face tradeoffs : • “No such thing as free lunch” • Give up one thing to get another –Opportunity Cost (OC) 2. Everything has an OC – whatever must be given up to get that item 3. People make decisions at the margins – increments matter 4. People respond to incentives – e. g. cigarette laws, communism 5. Free Trade is good (for everybody)

10 Principles of Economics 6. Markets organize economic activity - Adam Smith “Invisible Hand”

10 Principles of Economics 6. Markets organize economic activity - Adam Smith “Invisible Hand” 7. Governments can sometimes improve market outcome 8. A country’s standard of living depends upon its production power (productivity) 9. Prices rise when government prints too much money 10. Phillips curve – short run tradeoff between inflation and unemployment

Branches of Economics ¨ Micro: The Study of One Entity (firm, business, people) ¨

Branches of Economics ¨ Micro: The Study of One Entity (firm, business, people) ¨ Macro: The Study of a Collection of Things (national, aggregate)

How are Theories Developed? ¨ Decision-Makers – Firms, governments ¨ Markets – Place where

How are Theories Developed? ¨ Decision-Makers – Firms, governments ¨ Markets – Place where exchange takes place

Who REALLY Owns that Winery TIME Magazine; by Terry Mc. Carthy Consolidation is the

Who REALLY Owns that Winery TIME Magazine; by Terry Mc. Carthy Consolidation is the Norm ¨ 60% of U. S. wine is produced by the top five companies – Consolidation among distributors is squeezing out the medium-sized producers, who make from 100, 000 to 1 million cases a year ¨ Market is not growing – Only 10% of adults drink 86% of the wine ¨ Fixed Costs – Some wineries do not have enough volume to get a priority from distributors

Who REALLY Owns that Winery TIME Magazine; by Terry Mc. Carthy ¨ Reshuffling to

Who REALLY Owns that Winery TIME Magazine; by Terry Mc. Carthy ¨ Reshuffling to scarce resources – He can make lots of money just by shifting more of his production - and more of his customers – from 1. 5 L jugs of generic red that sell for less than $5 retail to smaller bottles of $7 Merlot ¨ The Future – The higher end is where the profits and the growth are to be found – The Italians have figured it out – how to create tastes that suit the American palate

Chapter 4 Demand & Supply

Chapter 4 Demand & Supply

Some Basic Definitions ¨ Market: a group of buyers and sellers of a particular

Some Basic Definitions ¨ Market: a group of buyers and sellers of a particular good or service – E. g. Warren Buffet has been buying up junk bonds – E. g. Bars, parties – informal market Stock market – organized market

Example of Supply & Demand ¨ Hong Kong chicken flu scare? Price of chicken

Example of Supply & Demand ¨ Hong Kong chicken flu scare? Price of chicken ¨ Mad cow disease in US? Price of beef ¨ Oprah bad mouths beef? Price of beef – Amarillo farmers sue her. ¨ SARS? (Macro issue…)

Demand Quantity demanded (Q): the amount of a good that buyers are willing and

Demand Quantity demanded (Q): the amount of a good that buyers are willing and able to purchase at a given price (P). Pints of Beer P QD $10. 00 0 7. 00 1 5. 00 3 4. 00 6 2. 00 11 0. 00 19

Market Demand versus Individual Demand ¨ Market demand refers to the sum of all

Market Demand versus Individual Demand ¨ Market demand refers to the sum of all individual demands for a particular good or service. ¨ Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

The Market Demand Curve When the price is $5. 00, The market demand curve

The Market Demand Curve When the price is $5. 00, The market demand curve is the Catherine will demand Nicholas 3 will demand 4 of the individual demand curves! beers. Catherine’s Demand Price of Beers + = Nicholas’s Demand Price of Beers 5. 00 4. 00 3 Quantity of Beers 6 4 7 Quantity of Beers When the price is $4. 00, Catherine will demand 6 Nicholas will demand 7 beers. The market demand horizontal sum at $5. 00 will be 7 beers. Market Demand 7 13 Quantity of Beers The market demand at $4. 00, will be 13 beers.

Graph Results ¨ Demand curve/schedule is downward sloping and shows the relationship between price

Graph Results ¨ Demand curve/schedule is downward sloping and shows the relationship between price of a good and the quantity demanded ¨ Why downward sloping? – Law of demand: Ceteris Paribus (all other things being equal) the quantity demanded falls when price rises

Other Determinants of Demand ¨ Income (I) : – I , D Normal Goods:

Other Determinants of Demand ¨ Income (I) : – I , D Normal Goods: car, Ferrari – I , D Inferior goods: bus rides, potatoes ¨ Price of related goods – Substitutes (inversely correlated) – Compliments (directly correlated)

Other Determinants of Demand ¨ Tastes – taken as above – You get old

Other Determinants of Demand ¨ Tastes – taken as above – You get old and prefer Lincoln Town cars to sports cars ¨ Expectations – about future – Income potential with EMBA degree – Loss of jobs, layoffs prospects ¨ Market Demand – More players Increase in demand – Buy IPO’s in 90’s

Shifts in Demand Curve ¨ Variables that shift the demand curve:

Shifts in Demand Curve ¨ Variables that shift the demand curve:

Price of Beer Shifts in the Demand Curve Increase in demand Demand curve, D

Price of Beer Shifts in the Demand Curve Increase in demand Demand curve, D 3 0 Demand curve, D 1 Demand curve, D 2 Quantity of Beer

Supply Quantity supplied (Q): the amount of a good that sellers are willing and

Supply Quantity supplied (Q): the amount of a good that sellers are willing and able to sell at a given price (P). Pints of Beer P QS $10. 00 12 7. 00 7 5. 00 4 4. 00 3 2. 00 1 0. 00 0

Supply ¨ Supply graph for another bar Pints of Beer P QS $10. 00

Supply ¨ Supply graph for another bar Pints of Beer P QS $10. 00 8 7. 00 5 5. 00 4 4. 00 3 2. 00 1 0. 00 0

Determinants of Supply ¨ Your own Price ¨ Input Prices – Cost of bottle

Determinants of Supply ¨ Your own Price ¨ Input Prices – Cost of bottle of beer: labor, capital, rent ¨ Technology – Smoking laws separation of smoking & drinking ¨ Expectations – Future outlook

Shifts in The Supply Curve ¨ Variables that shift the supply curve:

Shifts in The Supply Curve ¨ Variables that shift the supply curve:

Shifts In Supply Curve Price of Beer Supply curve, S 3 Decrease in supply

Shifts In Supply Curve Price of Beer Supply curve, S 3 Decrease in supply Supply curve, S 1 Supply curve, S 2 Increase in supply 0 Quantity of Beer

Equilibrium ¨ Equilibrium: the price where quantity supplied is equal to quantity demanded Equilibrium

Equilibrium ¨ Equilibrium: the price where quantity supplied is equal to quantity demanded Equilibrium 6

Markets Not In Equilibrium Excess Supply Price of Beer Supply Surplus $6. 50 4.

Markets Not In Equilibrium Excess Supply Price of Beer Supply Surplus $6. 50 4. 00 Demand 0 2 Quantity demanded 6 10 Quantity supplied Quantity of Beer

Markets Not In Equilibrium Excess Demand Price of Beer Supply $4. 00 2. 50

Markets Not In Equilibrium Excess Demand Price of Beer Supply $4. 00 2. 50 Shortage Demand 0 2 Quantity supplied 6 10 Quantity demanded Quantity of Beer

Changes in Equilibrium ¨ Decide whether the event shifts the supply or demand curve

Changes in Equilibrium ¨ Decide whether the event shifts the supply or demand curve (or both). ¨ Decide whether the curve(s) shift(s) to the left or to the right. ¨ Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

Changes in Equilibrium An increase in the price of hops reduces the supply of

Changes in Equilibrium An increase in the price of hops reduces the supply of beer An increase in wealth increases demand for beer Price of Beer Supply New equilibrium $6. 50 S 2 S 1 New equilibrium $6. 50 4. 00 Initial equilibrium 4. 00 D 2 Demand D 1 0 6 10 Pints of Beer 0 2 6 Pints of Beer

One bar closes… New Equilibrium S 2 $5. 00 4 S 1

One bar closes… New Equilibrium S 2 $5. 00 4 S 1

Article: Too Many Cars, WSJ; by: Paul Ingrassia ¨ Overcapacity is the biggest problem

Article: Too Many Cars, WSJ; by: Paul Ingrassia ¨ Overcapacity is the biggest problem for any automobile company in the world ¨ ¨ GM buys Daewoo Motor, Fiat Auto, Saab Ford motor owns Mazda, Land Rover Daimler Chrysler is riding to rescue Mitsubishi Oldsmobile and Chrysler’s Plymouth, are the first major automobile companies in 40 years ¨ Why do ailing automobile companies who decry overcapacity keep ailing car companies? • • • National pride plays a big role More brands mean more dealerships mean more sales. But this also means more costs and complexity in business operations. In reality, overcapacity is not really a problem. One man’s overcapacity is other’s bargain. Thus, lower priced leases and generous rebates abound in today’s car market.

Chapter 5 Elasticity

Chapter 5 Elasticity

Elasticity & Its Application ¨ Evaluating questions like– Banana Republic store manager/headquarters needs to

Elasticity & Its Application ¨ Evaluating questions like– Banana Republic store manager/headquarters needs to decide on sale on jeans vs. sale on shirts – Rain destroys strawberry crop, prices go . Does it benefit growers ? – Why don’t you ever see sale or discounts on pure milk but see it on orange juice ? ¨ These can be answered with the concept of elasticity (or responsiveness of buyers & sellers to changes in market conditions)

Elasticity ¨ Price elasticity of demand: a measure of how much the quantity demanded

Elasticity ¨ Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good

Continued. . ¨ Two types of demand: – Elastic – responds a lot e.

Continued. . ¨ Two types of demand: – Elastic – responds a lot e. g. luxury cars ( luxuries) – Inelastic – not much change e. g. milk, certain food items, gasoline ( necessities) ¨ Preferences: Luxuries vs. Necessities ¨ Availability of close substitutes: Elastic – Butter & margarine; cars, booze ¨ Time horizon: – Gasoline – necessity in short run – Substitute long run (electric cars, walk, bike)

Elasticity ¨ Inelastic Demand – Quantity demanded does not respond strongly to price changes.

Elasticity ¨ Inelastic Demand – Quantity demanded does not respond strongly to price changes. – Price elasticity of demand is < one. ¨ Elastic Demand – Quantity demanded responds strongly to changes in price. – Price elasticity of demand is > one.

Demand Curves ¨ Question: Can I tell from the graphical shape of the demand

Demand Curves ¨ Question: Can I tell from the graphical shape of the demand curve what kind of elasticity the curve has? ¨ Answer: Yes, but not all the time.

Perfectly Inelastic Demand Elasticity = 0 Price Demand $5 4 1. An increase in

Perfectly Inelastic Demand Elasticity = 0 Price Demand $5 4 1. An increase in price. . . 0 100 Quantity 2. . leaves the quantity demanded unchanged. 3. . revenue goes from $4 x 100 to $5 x 100

Inelastic Demand Elasticity < 1 Price $5 4 1. A 22% increase in price.

Inelastic Demand Elasticity < 1 Price $5 4 1. A 22% increase in price. . . Demand 0 90 100 Quantity 2. . leads to an 11% decrease in quantity demanded. 3. . revenue goes from $4 x 100 to $5 x 90

Unit Elastic Demand Elasticity = 1 Price $5 4 Demand 1. A 22% increase

Unit Elastic Demand Elasticity = 1 Price $5 4 Demand 1. A 22% increase in price. . . 0 80 100 2. . leads to a 22% decrease in quantity demanded. 3. . revenue goes from $4 x 100 to $5 x 80 Quantity

Elastic Demand Elasticity > 1 Price $5 Demand 4 1. A 22% increase in

Elastic Demand Elasticity > 1 Price $5 Demand 4 1. A 22% increase in price. . . 0 50 100 2. . leads to a 67% decrease in quantity demanded. 3. . revenue goes from $4 x 100 to $5 x 50 Quantity

Perfectly Elastic Demand Elasticity = Infinity Price 1. At any price above $4, quantity

Perfectly Elastic Demand Elasticity = Infinity Price 1. At any price above $4, quantity demanded is zero. $4 Demand 2. At exactly $4, consumers will buy any quantity. 0 3. At a price below $4, quantity demanded is infinite. Quantity

Relationship Between Total Revenue (Sales) & Elasticity ¨ Total Revenue = Price x Qty

Relationship Between Total Revenue (Sales) & Elasticity ¨ Total Revenue = Price x Qty Sold = P x Qty ¨ If demand is elastic, then a price decrease increases revenue ¨ If demand is inelastic, then a price increases revenue v. Example class to contribute

Box Shows the 50% Drop of New Paying Customers for the May & August

Box Shows the 50% Drop of New Paying Customers for the May & August 2004 Conference Caused by the Latest Price Hike Conference Date Attendance New Paying % of Total Feb’ 01 72 6 8% May’ 01 66 10 15% Aug’ 01 101 31 31% Nov’ 01 163 49 30% 189 28 15% May’ 02 160 42 26% Aug’ 02 195 62 32% Nov’ 02 169 44 26% Feb’ 03 260 55 21% May’ 03 196 37 19% Aug’ 03 220 43 20% Nov’ 03 222 40 18% Feb’ 04 238 48 20% 201 25 12% 211 23 11% Feb’ 02 May’ 04 Aug’ 04 1 st Price Hike 2 nd Price Hike

Applications of Supply, Demand & Elasticity ¨ Can good news for farmers be bad

Applications of Supply, Demand & Elasticity ¨ Can good news for farmers be bad news for farmers? ¨ Wheat is inelastic: Bumper crop bad news

Increase In Supply In Market For Wheat Price of Wheat 2. . leads to

Increase In Supply In Market For Wheat Price of Wheat 2. . leads to a large fall in price. . . 1. When demand is inelastic, an increase in supply. . . S 1 S 2 $3 2 Demand 0 100 110 Quantity of Wheat 3. . and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220.