The Demand Side of the Market


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Econ Dept, UMR Presents
The Demand Side of the Market

Starring
u Utility Theory u Consumer Surplus u Elasticity

Featuring
uThe MU/P Rule uThe Meaning of Value uFour Elasticities:
vPrice Elasticity of Demand vIncome Elasticity vCross Price Elasticity vPrice Elasticity of Supply
uThe Elasticity-TR Relationship

In Three Parts
Consumer Choice Theory
Consumer Surplus
Elasticity
A. Price Elasticity of Demand B. Other Important Elasticities

Part 3
Elasticity Measures of Response

This Slide Show Discusses Income Elasticity; Cross Price Elasticity of Demand; And Price Elasticity of Supply
u Price elasticity of demand is discussed in slide show III.A.

Review: A Generic Definition of Elasticity
u Y = f(x)
u Elasticity, ,, = %∆y/%∆x, where ∆ is read
“change in” u %∆Y = (∆y/y)*100; %∆X = (∆x/x)*100 u (∆Y/y)/(∆x/x), or u [(∆Y/∆x)/(x/y)] u In words, elasticity gives us the estimated
percentage change in one variable, y, in response to a percentage change in another variable, x, c.p.

Review: Generic Interpretation
of Elasticity
u , = %∆Y/%∆x = 2
v This means if x were to change by 1 percent we would expect y to change by 2 percent in the same direction, c.P
u , = %∆Y/%∆x = - 2
v This means if x were to change by 1 percent we would expect y to change by 2 percent in the opposite direction, c.p.

Other Important Elasticities

INCOME = ,I =
ELASTICITY

% change DX % change in consumer income

CROSS-PRICE = ,X,Z =
ELASTICITY

% change DX
% change in the price of another good, Z

PRICE ELASTICITY OF SUPPLY

=

,S

= % change Qs
% change in price

Elasticity Formulas

u Income elasticity

,=

%∆ in D =

∆D

I

I %∆ in I

∆I D

u Cross price elasticity of demand

, = %∆ in D1 =
D1,P2 %∆ in P2

∆D1 P2 ∆ P2 D1

u Price elasticity of supply

, = %∆ in QS = ∆QS P

S

%∆ in P

∆P Q

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The Demand Side of the Market