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# Law L of f Demand D d

Law of Demand
People do less of what they want to do as the cost of doing it rises

Recall the Cost-Benefit Principle
Pursue an action if and only if its benefits are at least as great as its costs

Recall R ll the h Reservation R i Price P i
The highest price we’d be willing to pay
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T Total lE Expenditure di Total Expenditure equals The number of units sold multiplied by the price of the good Total Expenditure = Total Revenue The dollar amount that consumers spend on a product o p oduct is s equal equa to the t e dollar do a amount a ou t that sellers receive 2 .

The Law of Demand and T Total lE Expenditure di “Will consumers spend more on my product if I sell more units at a lower price or fewer units at a higher price?” Depends upon price elasticity of demand When price rises. decrease. total expenditure may increase. quantity demanded rises 3 . or stay the same This is due to the Law of Demand As price rises. quantity demanded falls As price falls.

5.Fig.7 The Demand Curve for Movie Tickets 4 .

Fig. g 5.8 The Demand Curve for Movie Tickets 5 .

10 Total Expenditure as a Function of Price 6 .Fig. 5.

Price P i El Elasticity i i of f Demand D d In order to predict what will happen to total expenditures. We must know how much quantity will change when the price changes Price elasticity of demand is the percentage change in the quantity demanded that results from a one-percent one percent change in its price 7 .

Price P i El Elasticity i i of f Demand D d = εP D %Δ Q %ΔP D 8 .

demand you will always get a negative.WHY? For convenience we will take the absolute value 9 .P i El Price Elasticity i i Elastic – q quantity y changes g by y a lot when price changes even a little price elasticity is greater than one Inelastic – quantity changes by a little when price changes even a lot price elasticity is less than one Unit elastic – quantity change = price change price elasticity equals one When calculating price elasticity of demand.

11 Elastic and Inelastic Demand 10 . 5.Fig.

Price Elasticity and Expenditures For an elastic product Quantity demanded is highly responsive Percentage change in quantity dominates An A i increase in i price i will ill reduce d total t t l expenditure dit A decrease in price will increase total expenditure For an inelastic product Quantity demanded is not responsive Percentage change in price dominates An increase in price will increase total expenditure A decrease in price will decrease total expenditure 11 .

price elasticity will be higher in the long run than in the short run 12 .D Determinants i of f El Elasticity i i Substitution possibilities Price elasticity of demand will be relatively high if it is easy to substitute between products – Why? Budget share The larger the share of the budget the good uses tends to have higher price elasticities of demand – Why? Time Because substitution takes time.

E Examples l What are some goods that will have very y elastic demand? What are some goods that will have very inelastic i l i demand? d d? 13 .

C l l i Price Calculating P i El Elasticity i i Proportion by which quantity demanded changes divided by the proportion by which price changes %ΔQ = ε= %ΔP ΔQ Q P = ΔP P Q 1 slope 14 .

12 Graphical Interpretation of Price Elasticity of Demand 15 .Fig. 5.

Other Elasticities of Demand Income Elasticity of Demand The amount by which the quantity demanded changes in response to a onepercent change in income Positive for normal goods g for inferior goods g Negative 16 .