Demand and Supply:
Elasticities and GOVERNMENT-SET PRICES
This chapter is the first of the chapters in Part Five, “Microeconomics of Product Markets.” Students will benefit by reviewing Chapter 3’s demand and supply analysis prior to reading this chapter. Depending upon the course outline used in the micro principles course, this chapter could be taught after Chapter 3. Both the elasticity coefficient and the total receipts test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross and income elasticities of demand and price elasticity of supply are also addressed. Finally, price ceilings and price floors are discussed as well as the economic consequences on the market of government-set prices. WHAT’S NEW
The chapter title has been expanded to include the second topic – government-set prices. Throughout the discussion on price elasticity, examples (popcorn, movie tickets, etc.) are used instead of product X and product Y. An application section has been added to the cross elasticity discussion. The section on government-set prices has been rewritten with more current examples being included in the price ceiling discussion. Finally, the example of rock concert promoters using below-equilibrium prices has been moved to an Internet problem.
The Last Word has been changed. One of the Web-Based Questions has been revised. INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Define demand and supply and state the laws of demand and supply (review from Chapter 3). 2. Determine equilibrium price and quantity from supply and demand graphs and schedules (from Chapter 3). 3. Define price elasticity of demand and compute the coefficient of elasticity given appropriate data on prices and quantities. 4. Explain the meaning of elastic, inelastic, and unitary price elasticity of demand. 5. Recognize graphs of perfectly elastic and perfectly inelastic demand. 6. Use the total‑revenue test to determine whether elasticity of demand is elastic, inelastic, or unitary. 7. List four major determinants of price elasticity of demand. 8. Explain how a change in each of the determinants of price elasticity would affect the elasticity coefficient. 9. Define price elasticity of supply and explain how the producer’s ability to shift resources to alternative uses and time affect price elasticity of supply. 10. Explain cross elasticity of demand and how it is used to determine substitute or complementary products. 11. Define income elasticity and its relationship to superior and inferior goods. 12. Define ceiling price and floor price in relationship to the equilibrium price. 13. Explain by examples the economic effects of price ceilings and floors. 14. Define and identify the terms and concepts listed at end of the chapter. COMMENTS AND TEACHING SUGGESTIONS
1. Suggestions given for chapter 3 are also pertinent to this chapter, as an understanding of demand and supply is essential to understanding this chapter. 2. Find, or have the students find, real-world examples of changing prices to explore the forces of the changing demand and supply. Any daily newspaper or business periodical should have such articles. Articles on impacts of a drought, freeze, strike, or a new fad product would provide such examples. Use the examples to differentiate between changes in quantity demanded and change in demand. 3. Draw demand curves that illustrate relatively elastic, relatively inelastic and unitary elastic. When discussing the idea that every downward sloping demand curve has all three properties, use salt as an example. Ask the students if anyone knows what a box of...
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