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Supply and Demand

Applications
Chapter 4

Topics
A. Price elasticity
Calculating elasticities
Demand
Supply

Applications
Economics of agriculture
Impact of a tax on price and quantity
Floors and ceilings

Price elasticity
Demand how much the quantity
demanded changes when its price
changes
Necessities
Luxuries
Engels law

Price elasticity, contd


Calculating elasticities:
%Q Q / Q Q P
ED

%P
P / P
P Q

Q
P
Q (Q1 Q 2) / 2
ED

(Q1 Q 2) / 2 ( P1 P 2) / 2 P ( P1 P 2) / 2

Elastic Demand Shows Large


Quantity Response to Price
Change

Chapter 4
Figure 4-1

Chapter 4
Table 4-1

Chapter 4
Figure 4-2

Price Elasticity of Demand Falls


into Three Categories

Chapter 4
Figure 4-3

Perfectly Elastic
and Inelastic Demands

Chapter 4
Table 4-2

Chapter 4
Figure 4-4

Slope and Elasticity Are Not


the Same Thing

Chapter 4
Figure 4-5

A Simple Rule for Calculating the


Demand Elasticity

Elasticity and Revenue:

(Ch. 4. Table 4.3)

Chapter 4
Figure 4-6

Supply Elasticity Depends upon


Producer Response to Price

Applications:
Economics of Agriculture
Tax impact & incidence
Floors & ceilings
minimum wage
energy price controls

Chapter 4
Figure 4-7

Prices of Basic Farm Products


Have Declined Sharply

Chapter 4
Figure 4-8

Agricultural Distress Results from


Expanding Supply and Price-Inelastic
Demand

Chapter 4
Figure 4-9

Crop-Restriction Program Raise


both Price and Farm Income

Chapter 4
Figure 4-10

Gasoline Tax Falls on Both


Consumer and Producer

Chapter 4
Figure 4-11

The Minimum Wage and Teenage


Unemployment, 1947-2002

Chapter 4
Figure 4-12

Effects of a Minimum Wage

Chapter 4
Figure 4-13

Price Controls Produce


Shortages