b) Workers who make CD-Rs get a pay raise.

b) The figure above shows the

effect of rise in the wage page
workers who make CD-Rs. In
this case, the price of a factor
of production (labor) used to
produce CD-Rs rises. So the
supply of CD-Rs decreases
and the supply curve shifts
leftward.
As a result, the equilibrium price
rises from P0 to P1 and the
equilibrium quantity
decreases from Q0 to Q1.

2012 Pearson Addison-Wesley

2 (c) The

market research report also includes a

prediction about the effect on the market for pizza in
College Station of a recent news published in the Eagle.
The Eagle reported that pizza has been discovered to
help prevent heart diseases.
Unfortunately, your dog chewed up the report and all you
can read about the prediction is "quantity... by 150 at
each price." What does the prediction say?
The report predicts that the news will change
consumer preferences in favor of pizza, which
will "increase the quantity of pizza demanded
by 150 at each price."

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d) Use your graph to show the predicted effects on

the market for pizza. What are the predicted
equilibrium price and quantity?
The increase in demand
means the demand
curve shifts rightward
by 150 pizza at every
price, as illustrated in
the above figure by the
shift from D0 to D1.
The equilibrium price is
$9 and quantity is 700.

2012 Pearson Addison-Wesley

e) How will the market adjust in response to the

change before reaching the equilibrium?
As demand curve shifts rightward,
at the old price, $8, there is a
shortage of 150 pizzas.
The shortage will lead a rise in
price.
As the price rises, the quantity
demanded decreases along the
demand curve and the quantity
supplied increases along the
demand curve.
therefore the price rises bringing
the market to equilibrium at $9
and 700 pizzas per week.

2012 Pearson Addison-Wesley

2012 Pearson Addison-Wesley

ELASTICITY

Everything about pricing is about elasticity!

How do a firm decide whether they should cut the price?
Why do Disney charge more for tourists and less for locals?
Why do cinemas charge less during day time and more at night?
Why do airplane tickets have different prices for different people?
Why can we often enjoy a student discount?
Why do we see coupons everywhere?
.
From a theoretical point of view, the slope of demand and supply
curve is determined by elasticity( elasticity is not equal to
slope, only positively related!)

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Elasticity
How responsive is Y to changes in X?
EX: when you increase your study time(X), you want to know 1) if your
grade(Y) would change; 2) How much does your grade change in
respond to the change in X.

Elasticity is a standard measure of the change of one variable( Y)

in response to changes in another(X) while other things
influencing Y are held constant.
It gives a unified and quantitative answer to this question.

X elasticity of Y means the responsiveness of Y to changes in

X.
EX: study time elasticity of grade, Price elasticity of demand, income
elasticity of demand, price elasticity of supply

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Price Elasticity of Demand

The price elasticity of demand is a measure of the
responsiveness of the quantity demanded of a good to a
change in its price when all other influences on buying
plans remain the same.
all other influences on buying plans remain the same
mean demand does not change.

2012 Pearson Addison-Wesley

Price Elasticity of Demand

To calculate the price elasticity of demand:
We express the change in price as a percentage of the
average pricethe average of the initial and new price,
EX: when the price decreases from $6 to $4, the percentage
change in price is $2/$5=0.4=40%
and we express the change in the quantity demanded as a
percentage of the average quantity demandedthe average
of the initial and new quantity.
How much is the percentage decrease in the quantity
demanded from 10 pizzas per hour to 30 pizzas per hour?
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Price Elasticity of Demand

Calculating Price Elasticity of Demand
The price elasticity of demand is calculated by using the
formula:
Percentage change in quantity demanded
Percentage change in price

2012 Pearson Addison-Wesley

Price Elasticity of Demand

Figure 4.2 calculates the

price elasticity of demand
for pizza.
The price initially is $20.50
and the quantity
demanded is 9 pizzas an
hour.

2012 Pearson Addison-Wesley

Price Elasticity of Demand

The price falls to $19.50

and the quantity
demanded increases to 11
pizzas an hour.

The price falls by $1 and

the quantity demanded
increases by 2 pizzas an
hour.

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Price Elasticity of Demand

The average price is

$20 and the average
quantity demanded is
10 pizzas an hour.

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Price Elasticity of Demand

The percentage change in
quantity demanded, %Q,
is calculated as
Q/Qave x 100, which is
(2/10) x 100 = 20%.
The percentage change in
price, %P, is calculated
as P/Pave x 100, which is
($1/$20) x 100 = 5%.

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Price Elasticity of Demand

The price elasticity of

demand is
%Q / %P = 20% / 5%
= 4.

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Price Elasticity of Demand

A Units-Free Measure
Elasticity is a ratio of percentages, so a change the units
of measurement of price or quantity leaves the elasticity
value the same.
Minus Sign and Elasticity
The formula yields a negative value, because price and
quantity move in opposite directions.
But it is the magnitude, or absolute value, that reveals how
responsive the quantity change has been to a price
change.
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Price Elasticity of Demand

Inelastic and Elastic Demand
According to the degree of responsiveness, we divide
demand into five categories: perfectly inelastic, inelastic,
unit elastic, elastic, and perfectly elastic.
If the quantity demanded doesnt change at all when the
price changes, the good has a perfectly inelastic
demand.
EX: insulin
How much is the elasticity for a perfectly inelastic good?

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Price Elasticity of Demand

Figure 4.3(a) illustrates the

case of a good that has a
perfectly inelastic demand.
The demand curve is
vertical.

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Price Elasticity of Demand

Inelastic and Elastic Demand
If the percentage change in the quantity demanded is
infinitely large when the price barely changes, then the
good has a perfectly elastic demand.
EX: a soft drink from two vending machines next to each
other
How much is the elasticity for a perfectly elastic good?

2012 Pearson Addison-Wesley

Price Elasticity of Demand

Figure 4.3(c) illustrates the
case of perfectly elastic
demand.
The demand curve is a
horizontal demand curve.
When the price is $12, the
quantity demanded could be any
number between 0 and infinity;
Suppose the price increases to
$12.000000001, the quantity
demanded decreases to 0.
Therefore, the elasticity is infinity.

2012 Pearson Addison-Wesley

Price Elasticity of Demand

If the percentage change in the quantity demanded is smaller than
the percentage change in price,
the price elasticity of demand is less than 1 and the
inelastic demand.

good has

If the percentage change in the quantity demanded is greater than

the percentage change in price,
the price elasticity of demand is greater than 1 and the good has
elastic demand.
If the percentage change in the quantity demanded equals the
percentage change in price,
then the price elasticity of demand equals 1 and the good has unit
elastic demand.

2012 Pearson Addison-Wesley