Eco200 4-5

Equilibrium Elasticity
Managerial Economics (ECO200)
Rahul Singh AMSOM, rahul.singh@ahduni.edu.in
August 31, 2021

Individual Producer’s Supply Curve
Supply Curve → Quantity supplied of a good at various

levels of prices by an individual Producer.

levels of prices by an individual Producer.
Willingness to Accept

Aggregating from Individual Producers’ Supply Curves

Aggregate Supply Curve

levels of prices in the market.

levels of prices in the market.
Defining Market is key!

Shifts in Supply Curve

Shifts in the Supply Curve
Factors inducing shifts in supply curve. Discuss!

Shifts in the Supply Curve
Factors inducing shifts in supply curve. Discuss!

Technology
Input Cost → Raw material Cost, Interest Rate on Capital,
Wages
Expectations
Number of Sellers
Movement along the Supply Curve
Movement along the Supply curve → Changes in Prices

(DISCUSS!)

(DISCUSS!)
Shift in Demand while Supply curve is unchanged!

(DISCUSS!)
Shift in Demand while Supply curve is unchanged!
Changes in consumer tastes overnight!
Equilibrium
The Price at which quantity demanded equals quantity

supplied in a competitive market.
Equilibrium
The Price at which quantity demanded equals quantity

supplied in a competitive market.
Market Clears!
Equilibrium
QUIZ
Price Quantity Demanded Quantity Supplied

C1 C2 C3 P1 P2 P3
1 240 190 270 20 30 50
2 200 160 240 60 90 150
3 160 130 210 100 150 250
4 120 100 180 140 210 350
5 80 70 150 180 270 450
QUIZ

C1 C2 C3 P1 P2 P3
1 240 190 270 20 30 50
2 200 160 240 60 90 150
3 160 130 210 100 150 250
4 120 100 180 140 210 350
5 80 70 150 180 270 450
Draw the market demand and supply curves.
QUIZ

C1 C2 C3 P1 P2 P3
1 240 190 270 20 30 50
2 200 160 240 60 90 150
3 160 130 210 100 150 250
4 120 100 180 140 210 350
5 80 70 150 180 270 450
What is the equilibrium price? (POLL)
Quiz
Market Demand Equation!

Quiz
Qd = 800 − 100P
Market Supply Equation!

Quiz
Qd = 800 − 100P
Qs = 200P − 100
Quiz
Qd = 800 − 100P
Qs = 200P − 100

Quiz
Qd = 800 − 100P
Qs = 200P − 100

What is the equilibrium price? (POLL)
Equilibrium
Prices determine who consumes! → Consumers who have a

willingness to pay equal to or greater than the market
price.
Equilibrium

price.
Prices determine who produces! → Producers with costs
equal to or lower than the equilibrium price.
Equilibrium

price.
Prices determine who produces! → Producers with costs
equal to or lower than the equilibrium price.
Neither Consumers nor Producers have an incentive to
deviate from equilibrium! → Let’s prove this graphically!
Excess Supply
Excess Demand
Change in Equilibrium
How does the equilibrium price change in response to changes

in the economic environment.
How does the equilibrium price change in response to changes

in the economic environment.
Economic Environment
Demand side factors!
Supply side factors!
Solving for Equilibrium Graphically
In response to a change in economic environment

Carefully study the effect on Demand and Supply → Whether
they shift!

they shift!
Identify the direction of the shift.

they shift!
Draw the new demand and supply curves.

they shift!
Draw the new demand and supply curves.
The new point of intersection of supply and demand is the new
equilibrium price.
Solving for Equilibrium Algebraically
Given the demand and supply functions we can solve for

equilibrium price.
Given the demand and supply functions we can solve for

equilibrium price.
Market Demand curve!
Qd = 800 − 100P
Market Supply curve!
Qs = 200P − 100
In equilibrium,
Qs = Qd
In equilibrium,
Qs = Qd
⇒ 800 − 100P = 200P − 100
In equilibrium,
Qs = Qd
⇒ 800 − 100P = 200P − 100
⇒ 900 = 300P
⇒ P = 900/300 = 3
Solving for Changes in Equilibrium Algebraically
Due to increase in income, the new demand curve is given by:
Qd = 1100 − 100P
Qd = 1100 − 100P
Solve for the new equilibrium!

Qd = 1100 − 100P
Qs = Qd
Qd = 1100 − 100P
Qs = Qd
⇒ 1100 − 100P = 200P − 100
Qd = 1100 − 100P
Qs = Qd
⇒ 1100 − 100P = 200P − 100
⇒ 1200 = 300P
⇒ P = 1200/300 = 4
Solving for Changes in Equilibrium
Market Demand curve!
Qd = 500 − 100P
Market Supply curve!
Qs = 200P − 100
Solve Graphically.
Elasticity of Demand
Elasticity: How much one variable responds to changes in

another variable

another variable
Price Elasticity of Demand
% change in Quantity demanded for one % change in Prices

another variable
Income Elasticity of Demand
% change in Quantity demanded for one % change in Income

another variable
% change in Quantity demanded for one % change in Income
Cross Price Elasticity of Demand
% change in Quantity demanded for one % change in Price of
another good.
Formula
% change in Qd
Price Elasticity of Demand =
% change in P
Formula
% change in Qd
% change in P
Calculating % changes
Q2 − Q1
% change in Qd = 100 × ( )
Q1
P2 − P1
% change in P = 100 × ( )
P1
The formula can be written as:
100 × ( Q2Q−Q
1
1
)
100 × ( P2P−P
1
1
)
∆Q
Q
⇒ Price Elasticity of Demand = ∆P
P
P ∆Q
⇒ Price Elasticity of Demand = ×
Q ∆P
Find Price Elasticity of Demand by increasing price by 1 from

the initial price.

the initial price.
Calculate elasticity at Price=1
Demand Curve
Qd = 800 − 100P

the initial price.
Calculate elasticity at Price=1
Demand Curve
Qd = 800 − 100P
Calculate elasticity at price=0,4,7. (POLL)


Elastic if elasticity > 1

Unit Elastic if elasticity = 1
Inelastic if elasticity<1
Determinants of Price Elasticity of Demand. DISCUSS!

Availability of Substitutes

Luxury or Necessity!

Broad vs Narrow

Broad vs Narrow
Long run vs Short run

I ∆Q
Income Elasticity of Demand = ×
Q ∆I
Cross Price Elasticity of Demand
Pother ∆Q
Cross Price Elasticity of Demand = ×
Q ∆Pother
Elasticity and Revenue
Calculate the price elasticity of demand at Price=1,5,10.

(POLL)
Demand Curve
25
Qd =
P
Elasticity and Revenue: Applications
The Ministry of Health, GOI has sought your advice on policy

related to controlling the sale of cigarettes in the black market
during lockdown. The ministry is concerned that the sharp
increase in prices will have a negative effect on the health of
smokers with low incomes as they may reduce expenditures on
essential goods like food, medicines and personal hygiene
products. The Economic advisor to the ministry proposes that
all government resources should be used to enforce lock down
rules and shut down the illegal black market that are
operating all over the city. The government has also started
an advertisement campaign focusing on the health risks
attached to smoking and highlighting the increased risk of
hospitalization for Covid-19 infected smokers. (POLL)
One side effect of illegal drug use is crime → Users often turn
to crime to finance their habit
Let’s examine two policies designed to reduce illegal drug use
and see what effects they have on drug-related crime.
Interdiction
Education spending
Interdiction
education

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Equilibrium Elasticity

Managerial Economics (ECO200)

Rahul Singh AMSOM, rahul.singh@ahduni.edu.in

August 31, 2021

Individual Producer’s Supply Curve

Supply Curve → Quantity supplied of a good at various

Individual Producer’s Supply Curve

Supply Curve → Quantity supplied of a good at various

Individual Producer’s Supply Curve

Aggregating from Individual Producers’ Supply Curves

Aggregate Supply Curve

Supply Curve → Quantity supplied of a good at various

Aggregate Supply Curve

Supply Curve → Quantity supplied of a good at various

Aggregate Supply Curve

Shifts in Supply Curve

Shifts in the Supply Curve

Factors inducing shifts in supply curve. Discuss!

Shifts in the Supply Curve

Factors inducing shifts in supply curve. Discuss!

Movement along the Supply Curve

Movement along the Supply curve → Changes in Prices

Movement along the Supply Curve

Movement along the Supply curve → Changes in Prices

Movement along the Supply Curve

Movement along the Supply curve → Changes in Prices

The Price at which quantity demanded equals quantity

The Price at which quantity demanded equals quantity

Price Quantity Demanded Quantity Supplied

Price Quantity Demanded Quantity Supplied

Price Quantity Demanded Quantity Supplied

Market Demand Equation!

Market Demand Equation!

Market Supply Equation!

Market Demand Equation!

Market Supply Equation!

Market Demand Equation!

Market Supply Equation!

Draw the market demand and supply curves.

Market Demand Equation!

Market Supply Equation!

Draw the market demand and supply curves.

Prices determine who consumes! → Consumers who have a

Prices determine who consumes! → Consumers who have a

Prices determine who consumes! → Consumers who have a

How does the equilibrium price change in response to changes

How does the equilibrium price change in response to changes

Solving for Equilibrium Graphically

In response to a change in economic environment

Solving for Equilibrium Graphically

In response to a change in economic environment

Solving for Equilibrium Graphically

In response to a change in economic environment

Solving for Equilibrium Graphically

In response to a change in economic environment

Solving for Equilibrium Algebraically

Given the demand and supply functions we can solve for

Solving for Equilibrium Algebraically

Given the demand and supply functions we can solve for

Market Supply curve!

Solving for Equilibrium Algebraically

Solving for Equilibrium Algebraically