Notes on Demand, Elasticity, and Assignment Guidelines (Week 10)

Assignment logistics and course context

  • There is an upcoming Bloomberg case study for Assignment 1, available as a PDF on MyUni; a Bloomberg article link is provided in the slides (login may be required for first link).
  • Assignment 1 topic: demand and supply (based on the article). Topics on elasticity are not required for this assignment.
  • Page: “Assessment overview” shows best four out of five rule for exercises like quizzes and written assignments; you may undertake all five, but your lowest score is dropped (best four of five).
  • Due date and submission details:
    • Due by the end of next week; end-of-week deadline is 11:59 PM Sunday.
    • Submission portal closes at the stated due date/time; late submissions are generally not accepted.
    • Certain extensions may be granted under the university policy for modified arrangements (medical, compassionate, and extenuating circumstances).
  • Assignment structure and expectations:
    • 800-word limit; 5% of course grade.
    • Not a research assignment; you should use provided article and your knowledge of the curriculum.
    • Include at least one diagram; you may hand-draw diagrams and embed them in your document, or use software to create diagrams.
    • You should reference sources if you use them; Harvard style is recommended if you don’t have another standard university style.
    • Diagrams are required and should be your own depiction (hand-drawn acceptable; avoid copying from textbooks).
  • How to approach demand and supply analysis (brief recap):
    • Identify whether demand or supply factors have changed; explain why the curves shift; show the changes on the diagrams; relate to the outcomes.
    • Use economic terminology consistently; connect diagrammatic changes to outcomes in price and/or quantity.
  • Use of examples from past submissions:
    • Three high-achieving student submissions from last semester are provided as exemplars; they illustrate various ways to structure the analysis.
    • You don’t have to mimic them exactly, but they show how to discuss supply-side factors, demand-side factors, and the resulting diagrams.
  • Diagrams and format:
    • You can include multiple diagrams, but at least one is required.
    • Diagrams can be embedded images, scanned hand-drawn diagrams, or computer-generated; ensure they are legible and labeled.
    • Do not rely solely on text; diagrams should be integrated with explanation.
  • Use of generative AI tools:
    • AI tools guidelines: use AI to uplift quality, not as a substitute for your own work.
    • Do not submit AI-generated content as your own work; it should reflect your own understanding and application of course concepts.
    • You may use AI to edit or refine your draft (e.g., conciseness, checking ideas), but ensure the final submission emphasizes your own analysis and terminology.
    • If AI is used, ensure key course concepts and diagrams are correctly represented and cited; avoid overreliance on AI.
  • Plagiarism and integrity:
    • Submissions go through Turnitin; each assignment should be substantially original.
    • Do not share files with peers; discussions are fine, but do not copy a friend’s submission.
  • Online resources and online discussion:
    • If you have questions about extensions or policy, contact the lecturer; general questions can be posted on the MyUni discussion board or the economics drop-in center.
  • General guidance for the assignment:
    • You will be graded against five assessment criteria with scores that sum to 100; each criterion has a specific weight (e.g., 25, 20, 25, 25, 5).
    • The assessment criteria emphasize understanding of concepts, ability to apply models to the case study, and the clarity and coherence of explanations, including diagrammatic support.
  • What you do not need to search online for this assignment:
    • You already have a provided case study; external research is not required.
  • Word count and formatting:
    • Word count is measured by the MyUni system; the reference list and figure captions may be excluded from the word count depending on university policy.
    • You should use a standard university reference style (Harvard recommended) for in-text citations and the reference list.
  • Practical logistics:
    • Typed submissions are required; handwriting is allowed for diagrams but the report itself should be typed (typing aids allowed).
    • Turnitin checks against online sources and against other students; keep your work separate and original.
  • Brief note on course pacing:
    • This week’s content precedes a deeper focus on elasticity (elasticity is the main topic for the class).
    • A quick recap on the relationship between demand/supply shifts and outcomes will set up the elasticity discussion.

Elasticity: core concepts and terminology

  • Elasticity as a measure of responsiveness:
    • Price elasticity of demand (own-price elasticity):
    • Definition: the responsiveness of quantity demanded to price changes.
    • Formula (arc form for between two points): ed = rac{ rac{Q2 - Q1}{ rac{Q1 + Q2}{2}} }{ rac{P2 - P1}{ rac{P1 + P_2}{2}} }
      • This is the arc (midpoint) elasticity between two points on a demand curve.
    • Units: elasticities are unitless.
    • Sign: due to the downward-sloping demand, elasticity is typically negative; the magnitude (absolute value) is used to judge elastic vs inelastic.
    • Interpretation by magnitude:
      • Elastic when |e_d| > 1: quantity changes more than price in percentage terms.
      • Inelastic when |e_d| < 1: quantity changes less than price.
      • Unit elastic when |e_d| = 1: total revenue is locally maximized with respect to price.
    • The midpoint (arc) formula is often used in introductory courses to avoid path dependence when moving from point A to point B.
    • Point elasticity (not required in this course) uses calculus to compute elasticity at a specific point on a curve; arc elasticity averages elasticity along the arc between two points.
  • Relationship to total revenue (TR):
    • If demand is price inelastic (|e_d| < 1), increasing price raises total revenue.
    • If demand is price elastic (|e_d| > 1), increasing price lowers total revenue.
    • If demand is unit elastic (|e_d| = 1), changes in price do not change total revenue (in the immediate vicinity).
  • Elasticity along a straight-line demand curve:
    • Elasticity is not constant along a line; it varies with position.
    • Example progression on a straight-line downward demand curve:
    • At point A: e_d ≈ -0.556 (inelastic region).
    • At point B: e_d ≈ -1 (unit elastic at the midpoint).
    • At point C: e_d ≈ -1.8 (elastic region).
    • As you move left along the curve (higher price, lower quantity), elasticity tends to increase in absolute value (more elastic); as you move right (lower price, higher quantity), elasticity tends to decrease (more inelastic).
  • Special cases and theoretical extremes:
    • Perfectly inelastic demand: vertical demand curve (quantity demanded is unresponsive to price).
    • Perfectly elastic demand: horizontal demand curve (any price change destroys quantity demanded to zero).
    • Infinitely elastic demand is a theoretical extreme where any tiny price increase causes quantity to drop to zero (e.g., multiple separate Coca-Cola machines at the same price in a row).
  • Determinants of own-price elasticity of demand:
    • Availability of close substitutes:
    • More substitutes → higher elasticity (more responsive).
    • Passage of time:
    • Over time, consumers can adjust (more elastic in the long run).
    • Luxuries vs necessities:
    • Necessities tend to be inelastic; luxuries tend to be more elastic.
    • Share of the budget:
    • Small-budget items tend to be inelastic; large-budget items more elastic.
    • Market definition (scope narrow vs broad):
    • Narrowly defined markets (e.g., Pepsi) tend to be more elastic because close substitutes exist within a small category; broadly defined markets (soft drinks) tend to be less elastic.
    • Habit formation and switching costs:
    • Habits (e.g., daily coffee) may slow the response to price changes in the short run.
  • Cross-price elasticity of demand (substitutes and complements):
    • Definition:
    • e{xy} = rac{ rac{Qx2 - Qx1}{ rac{Qx1 + Qx2}{2}}}{ rac{Py2 - Py1}{ rac{Py1 + Py_2}{2}}}
    • Sign conventions:
    • Substitutes: positive cross-price elasticity (e.g., Pepsi and Coca-Cola).
    • Complements: negative cross-price elasticity (e.g., petrol-powered cars and petrol).
    • Unrelated goods: cross-price elasticity ≈ 0.
  • Income elasticity of demand:
    • Definition: eI = rac{ rac{Q2 - Q1}{ rac{Q1 + Q2}{2}}}{ rac{I2 - I1}{ rac{I1 + I_2}{2}}}
    • Sign conventions:
    • Normal goods: positive income elasticity.
    • Inferior goods: negative income elasticity.
    • Classifications:
    • Luxuries: income elasticity > 1.
    • Necessities: income elasticity between 0 and 1.
  • Price elasticity of supply:
    • Definition: es = rac{ rac{Qs2 - Qs1}{ rac{Qs1 + Qs2}{2}}}{ rac{P2 - P1}{ rac{P1 + P_2}{2}}}
    • Always positive due to the law of supply (upward-sloping supply curve).
    • Elastic vs inelastic:
    • If |e_s| > 1: elastic supply.
    • If |e_s| < 1: inelastic supply.
  • Determinants of elasticity in supply (short-run vs long-run):
    • Passage of time: longer time horizons allow more production adjustments, increasing elasticity.
    • Production capacity and flexibility: easier/cheaper to adjust output → higher elasticity.
  • Elasticity and market definitions (recap):
    • Narrowly defined markets (e.g., Pepsi) tend to be more elastic than broad markets (soft drinks).
    • The share of the good in the consumer’s budget affects responsiveness to price changes.
  • Elasticity and behavior of firms with market power:
    • Revenue considerations depend on elasticity: inelastic demand may allow price increases to raise revenue; elastic demand may require price reductions to increase revenue.
    • Note: profit is the ultimate objective, which involves cost considerations as well as revenue.
  • Straight-line demand and revenue insight:
    • For a straight-line downward demand curve, total revenue first increases and then decreases as quantity increases and price falls; there is a revenue-maximizing point that coincides with unit elasticity on some curves.
    • The classic result: a straight-line demand curve has unit elasticity at the midpoint.

Elasticity in the context of the course and the Bloomerg case study

  • The core task is to connect the case study to the relevant demand and supply diagrams and explain the shifts and their effects on price and quantity.
  • The diagrams should be accompanied by a textual explanation linking the shifts in curves to the observed outcomes in the Bloomberg case study.
  • In assignments, you are not required to perform high-level calculus-based elasticity; the midpoint (arc) elasticity is typically sufficient for describing changes between two points.
  • Practical tip: when presenting elasticity, explicitly indicate whether you are talking about elastic or inelastic regions and what that implies for price and revenue in the case.
  • Unit handling and notation:
    • Keep in mind sign conventions (own-price elasticity is generally negative; cross-price elasticity can be positive or negative depending on substitutes or complements).
    • Be careful about when you discuss the magnitude versus the sign; you may refer to the absolute value when talking about elastic vs inelastic without emphasizing the negative sign.

Worked equilibrium examples (illustrative, to connect math with intuition)

  • Example 1 (linear demand and supply):
    • Demand: Q_d = 200 - 5P
    • Supply: Q_s = 5P
    • Set equal to find equilibrium: 200 - 5P = 5P \ 200 = 10P \ P^* = 20
    • Equilibrium quantity: Q^* = Q_s(P^*) = 5 imes 20 = 100
  • Example 2 (inverse demand and supply with midpoint):
    • Inverse demand: P = 1000 - 100Qd \ ext{or rearranged: } Qd = 10 - 0.01P
    • Supply: Q_s = 0.01P
    • Set equal to find equilibrium: 10 - 0.01P = 0.01P \ 10 = 0.02P \ P^* = 500
    • Equilibrium quantity: Q^* = Q_s(P^*) = 0.01 imes 500 = 5
  • These examples illustrate solving for equilibrium price and quantity by equating quantity demanded and supplied, and show how the algebra connects to the diagrammatic intuition.

Practical implications and exam-oriented notes

  • You may be asked to explain the effect of a shift in supply or demand on price and quantity given a particular shape of the demand or supply curve; emphasize the direction of the shift and the resulting movement along the graph.
  • Be prepared to discuss how the elasticity of demand at different points on a demand curve affects revenue outcomes, including the concept of unitary elasticity at the midpoint on a straight-line demand curve.
  • When describing determinants of elasticity, give concrete examples (e.g., cigarettes or petrol as inelastic goods; the availability of substitutes for petrol in the short run vs long run).
  • Remember the social and policy relevance: elasticity concepts help explain how taxes, subsidies, or price controls affect welfare, tax burden, and revenue.
  • In the assignment, you should include at least one diagram, explain the shifts that occur, and connect them to the textual interpretation of outcomes in the Bloomberg case study.

Quick reference: key formulas recap

  • Own-price elasticity of demand (arc form):
    ed = rac{ rac{Q2 - Q1}{(Q1 + Q2)/2} }{ rac{P2 - P1}{(P1 + P_2)/2} }
  • If you’re talking about a single point, point elasticity (not required here) uses calculus to take the derivative of Q w.r.t. P.
  • Revenue intuition (for a given price P and quantity Q):
    • If |e_d| > 1 (elastic): lowering price tends to increase total revenue; raising price tends to reduce total revenue.
    • If |e_d| < 1 (inelastic): raising price tends to increase total revenue; lowering price tends to reduce total revenue.
    • If |e_d| = 1 (unit elastic): price changes do not affect total revenue locally.
  • Cross-price elasticity of demand:
    e{xy} = rac{ rac{Qx2 - Qx1}{(Qx1 + Qx2)/2} }{ rac{Py2 - Py1}{(Py1 + Py_2)/2} }
  • Income elasticity of demand:
    eI = rac{ rac{Q - Q0}{(Q + Q0)/2} }{ rac{I - I0}{(I + I_0)/2} }
  • Price elasticity of supply:
    es = rac{ rac{Qs2 - Qs1}{(Qs1 + Qs2)/2} }{ rac{P2 - P1}{(P1 + P_2)/2} }
  • Market equilibrium condition (general): set
    Qd(P) = Qs(P) to solve for the equilibrium price P* and then compute Q* from either equation.

Key takeaways for exams

  • Be able to explain how a shift in demand or supply translates into a diagrammatic shift and a new equilibrium outcome.
  • Be able to compute elasticity using the arc/midpoint formula between two points and interpret its magnitude and sign.
  • Be able to discuss determinants of elasticity with concrete examples and relate them to policy implications (tax burden, revenue considerations).
  • Be able to perform a simple equilibrium calculation using linear demand and supply equations and interpret the results.
  • Be familiar with how to reference sources and structure an assignment with a clear link between diagrammatic analysis and the accompanying textual explanation.