Business Economics

IMT- G02

Session I

Chapter 1 - The Art of Economic Analysis

Chapter 2 - Demand, Supply & Markets
Chapter 3 - Elasticity of Demand and Supply
he Art and Science of Economic Analy
CHAPTER
1
Designed by
Amy McGuire, B-books, Ltd.
 The Economic Problem

Wants, desires:
unlimited RESOURCES
Resources: scarce Inputs; factors of production
Economic choice Used to produce goods and
services
Goods and services are scarce
because resources are scarce
1. Labor
2. Capital
3. Natural Resources
LO1 4. Entrepreneurial ability
LO1 The Simple Circular-Flow Model
for Households and Firms
Households
- Supply resources to
Exhibit 1

resource market; earn

income
- Demand goods and
services from product
market; spend income

Firms
- Demand resources to
produce goods and
services; payment for
resources
- Supply goods and
services to product market;
earn revenue
Economic Analysis
Is Marginal
Analysis
Expected marginal benefit
Expected marginal cost
Marginal
Incremental, additional, extra
Rational decision maker:
Change the status quo if expected
marginal benefit exceeds expected
marginal cost

LO2
 Micro
Demand, Supply, and Markets
CHAPTER
2
 Law of Demand

Substitution effect
Relative price
Price of a good relative
Income effect
to the prices of other
goods Money income

Lower price Real income

Lower relative price Lower price

More willing to purchase the Greater real income

good Increase ability to purchase
all goods
LO1
LO1 Exhibit 1
The Demand Schedule and
Demand Curve for Pizza
(a) Demand schedule
Price Quantity $15 a
per Demanded

Price per pizza

12 b
pizza Per week
(millions)
9 c
a $15 8
b 12 14 6 d
c 9 20
3 e
d 6 26
e 3 32 D
The market demand D shows the quantity of pizza
demanded, at various prices, by all consumers. 0 8 14 20 26 32
Price and quantity demanded are inversely related.
Millions of pizzas per week
 Shifts of the Demand Curve

Determinants of demand
1. Money income of consumers
2. Price of a substitute or a complement
3. Consumer expectations
4. Number of consumers
5. Consumer tastes

LO4
LO1 An Increase in the Market
Demand for Pizza

An increase in the demand for

$15
pizza is shown by a rightward
b shift of the demand curve, so
Price per pizza

12 f
the quantity demanded
increases at each price.
9
Exhibit 2

3 D
D

0 8 14 20 26 32
Millions of pizzas per week
LO2 Exhibit 3
The Supply Schedule and Supply Curve for Pizza
(a) Supply schedule (b) Supply curve
S
Price Quantity
Supplied $15
per
pizza Per week

Price per pizza

(millions) 12
$15 28
9
12 24
9 20
6
6 16
3 12 3
The market supply S shows the
quantity of pizza supplied, at various
prices, by all pizza makers.
Price and quantity supplied are directly 0 12 16 20 24 28
related.
Millions of pizzas per week
 Shifts in the Supply Curve
Determinants of supply
1. Technological change
2. Price of a relevant resource
3. Price of an alternative good
4. Producers expectations
5. Number of producers

LO4
LO2 Exhibit 4
An Increase in the Supply of Pizza
S S
$15
g
Price per pizza

12 h An increase in the supply of

pizza is reflected by a
9 rightward shift of the supply
curve, from S to S.
6
Quantity supplied increases
3 at each price level.

0 12 16 20 24 28
Millions of pizzas per week
LO3 Exhibit 5(a)
Equilibrium in the Pizza Market
(a) Market schedules

Millions of pizzas per Week

Price per Quantity Quantity Surplus or
pizza Demanded Supplied Shortage Effect on Price
$15 8 28 Surplus of 20 Falls
12 14 24 Surplus of 10 Falls
9 20 20 Equilibrium Remains the same
6 26 16 Shortage of 10 Rises
3 32 12 Shortage of 20 Rises
LO3 Exhibit 5(b)
Equilibrium in the Pizza Market
(b) Market curves
S
Market equilibrium occurs at:
$15 Surplus Price where QD=QS; Point c
Price per pizza

12 Above the equilibrium price:

QS>QD;
9 c Surplus;
Downward pressure on P
6
Below the equilibrium price:
3 Shortage D
QD>QS;
Shortage;
Upward pressure on P
0 14 16 20 24 26
Millions of pizzas per week
 Micro
Elasticity of Demand and Supply
CHAPTER
3
 Price Elasticity of Demand

%q
ED
%p If %q < %p
q p ED between 0 and 1
ED Inelastic D
(q q' ) / 2 ( p p' ) / 2
If %q > %p
ED greater than 1
Elastic D
If %q = %p
ED = 1
LO1 Unit elastic D
LO1 Exhibit 3
Constant-Elasticity Demand Curves
(a) Perfectly elastic (b) Perfectly inelastic (c) Unit elastic
D

Price per unit

Price per unit
Price per unit

ED = 1
ED = 0
ED = $10 a
p D
b
6
D

0 Quantity per period 0 Q Quantity 0 60 100 Quantity

per period per period
Consumers demand all quantity
offered for sale at p, but demand Consumers demand Q Total revenue is the same
nothing at a price above p regardless of price for each p-q combination
LO2 Exhibit 5
Demand Becomes More Elastic over Time

Dw: one week after the price increase

Price per unit

$1.25 Dm: one month after the price increase

Dy: one year after the price increase

1.00 e

Dy
Dw Dm

0 50 75 95 100 Quantity per day

Dy is more elastic than Dm , which is more elastic than Dw
 Determinants of Price
Elasticity of Demand

ED is greater:
The greater the availability of substitutes,
and the more similar the substitutes
The more important the good as a share of
the consumers budget
The longer the period of adjustment (time)

LO2
 Price Elasticity of Supply

Elasticity
Responsiveness
Price elasticity of supply
Producers responsiveness to a change
in price
Percentage change in quantity supplied
divided by percentage change in price

LO3
LO3 Exhibit 8
Constant-Elasticity Supply Curves
(a) Perfectly elastic (b) Perfectly inelastic (c) Unit elastic

Price per unit

S

Price per unit

Price per unit

S
ES = 1

ES = 0
ES = $10
p S
5

0 Quantity 0 Q Quantity 0 10 20 Quantity

per period per period per period
Firms supply any amount of
output demanded at p, but Quantity supplied is Any %p results in the
supply 0 at prices below p. independent of the price same %q supplied.
LO3 Exhibit 9
Supply Becomes More Elastic over Time
Sw Sm
Sw: one week after the
Sy
price increase
$1.25
Price per unit

Sm: one month after the

price increase
1.00
Sy: one year after the
price increase

0 100 110 140 200 Quantity per day

Sw is less elastic than Sm, which is less elastic than Sy

 Income Elasticity of Demand

ey = % q
% Y

Normal goods
Income inelastic
Elasticity between 0 and 1
Necessities
Income elastic
Elasticity > 1
Luxuries
LO4
 Cross-Price Elasticity of Demand

eC = % Qx
% Py

Responsiveness of D for one good to

changes in P of another good
% in demand for one good divided by
% in price of another good
If positive: substitutes
If negative: complements
If zero: unrelated
LO4
 Doubt Clearing Session-
(15-20 minutes)
Including discussion on opportunity
cost & market disequilibrium
 CASE ANALYSIS

Price Elasticity of On-street Parking

Demand: A Case Study from Seattle

(Pg.312) (30 minutes)

Recapitulation
(10 Minutes)