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Micro - economy
Chapter 2: Demand and Supply Analysis
1)The mixed economy
Goede werking
Enorme stijging door kapitalistische revolutie: 3 kenmerken
vrije markt, …
Micro - economy 1
, ver van perfect
environmental concerns: global warming, increasing pollution,
excessive use of natural resources
potential negative effects of globalization
inequality, both between and within countries
poverty
2) A quick review: Demand, supply, equilibrium,
elasticities
Micro - economy 2
, Measure to what extent buyers and sellers respond to changes in
market conditions
price, cross-price, income, advertising, wage, energy price elasticity
of demand and supply
Shifts in supply and demand
Elasticities
The price elasticity of demand
Measures how much the quantity demanded of a good responds
to a change in price
It is computed as the percentage change in the quantity
demanded divided by the percentage change in price:
P = ((dQ )/Q )/(dP /P ) = (dQ )/dP ∗ P /Q
εD D D D D
Numerical example: the direction of change matters
If the price increases from $2.00 to $2.20 and the quantity
demanded falls from 10 to 8 units, then the elasticity of
demand is calculated as:
εD
P = (((8 − 10))/10)/(((2.20 − 2.00))/2.00) = −2
If the price decreases from $2.20 to $2.00 and the quantity
demanded rises from 8 to 10 units, the elasticity of demand
Micro - economy 3
, is calculated as:
P = (((10 − 8))/8)/(((2.00 − 2.20))/2.20) = −2.75
εD
⇒ beide verschillende getallen ondanks het gaat om
dezelfde verandering ⇒ midpoint method ⇒ om dat te
vermijden
Arc elasticity (The Midpoint Method)
The midpoint formula or arc elasticity gives the same
answer regardless of the direction of the change
Price: $2.00 à $2.20; Quantity: 10 à 8
Price elasticity of demand
P = (((8 − 10))/((10 + 8)/2))/(((2.20 −
εD
2.00))/((2.00 + 2.20)/2)) = −2.33
Determinants of the price elasticity of demand
Availability of close substitutes
Definition of the market
Necessities versus luxuries
Time horizon (short-run vs long-run)
⇒ Demand tends to be more elastic :
the larger the number of close substitutes
the more narrowly defined the market
if the good is a luxury
the longer the time horizon (exception: durable goods. Why?)
Elastic and inelastic demand
Inelastic demand: εD
P > −1or∣εD
P ∣ < 1
Quantity demanded declines less than proportionally
Elastic demand: εD
P < −1or ∣εD
P ∣ > 1
Q demanded declines more than proportionally
Two extremes
Perfectly inelastic: εD
P =0
Micro - economy 4
Micro - economy
Chapter 2: Demand and Supply Analysis
1)The mixed economy
Goede werking
Enorme stijging door kapitalistische revolutie: 3 kenmerken
vrije markt, …
Micro - economy 1
, ver van perfect
environmental concerns: global warming, increasing pollution,
excessive use of natural resources
potential negative effects of globalization
inequality, both between and within countries
poverty
2) A quick review: Demand, supply, equilibrium,
elasticities
Micro - economy 2
, Measure to what extent buyers and sellers respond to changes in
market conditions
price, cross-price, income, advertising, wage, energy price elasticity
of demand and supply
Shifts in supply and demand
Elasticities
The price elasticity of demand
Measures how much the quantity demanded of a good responds
to a change in price
It is computed as the percentage change in the quantity
demanded divided by the percentage change in price:
P = ((dQ )/Q )/(dP /P ) = (dQ )/dP ∗ P /Q
εD D D D D
Numerical example: the direction of change matters
If the price increases from $2.00 to $2.20 and the quantity
demanded falls from 10 to 8 units, then the elasticity of
demand is calculated as:
εD
P = (((8 − 10))/10)/(((2.20 − 2.00))/2.00) = −2
If the price decreases from $2.20 to $2.00 and the quantity
demanded rises from 8 to 10 units, the elasticity of demand
Micro - economy 3
, is calculated as:
P = (((10 − 8))/8)/(((2.00 − 2.20))/2.20) = −2.75
εD
⇒ beide verschillende getallen ondanks het gaat om
dezelfde verandering ⇒ midpoint method ⇒ om dat te
vermijden
Arc elasticity (The Midpoint Method)
The midpoint formula or arc elasticity gives the same
answer regardless of the direction of the change
Price: $2.00 à $2.20; Quantity: 10 à 8
Price elasticity of demand
P = (((8 − 10))/((10 + 8)/2))/(((2.20 −
εD
2.00))/((2.00 + 2.20)/2)) = −2.33
Determinants of the price elasticity of demand
Availability of close substitutes
Definition of the market
Necessities versus luxuries
Time horizon (short-run vs long-run)
⇒ Demand tends to be more elastic :
the larger the number of close substitutes
the more narrowly defined the market
if the good is a luxury
the longer the time horizon (exception: durable goods. Why?)
Elastic and inelastic demand
Inelastic demand: εD
P > −1or∣εD
P ∣ < 1
Quantity demanded declines less than proportionally
Elastic demand: εD
P < −1or ∣εD
P ∣ > 1
Q demanded declines more than proportionally
Two extremes
Perfectly inelastic: εD
P =0
Micro - economy 4
