Microeconomic Concepts of Demand and Elasticity

Discussion on the laws of demand and supply.
Differentiation between effects causing shifts in demand/supply curves and movements along existing curves.
Cover the duality of demand and supply, outlining how they interact in the market.
Introduction to market equilibrium and the role of price in achieving it.
Concepts of shortages and surpluses in markets.
Strategies to integrate these concepts cohesively.

Market Equilibrium Price as a Regulator:
- If the price is set at $2.00 for an energy bar, the market experiences a surplus of 6 million energy bars due to quantity supplied exceeding quantity demanded.
Market Equilibrium:
- At a price of $1.00 for an energy bar, there is a shortage of 9 million energy bars because quantity demanded is greater than quantity supplied.
- Emphasis on the role of price as a regulator in balancing supply and demand.

Equations governing the market for widgets:
- Demand equation: P = 110 - 20Q_d
- Supply equation: P = 20 + 10Q_s
- Finding Equilibrium:
- Equilibrium quantity (Q^*) = 3
- Equilibrium price (P^*) = 50
Demand Shift Example:
- New demand equation after shift in tastes for widgets: P = 80 - 5Q_d
- Resulting changes:
- New equilibrium quantity (Q^*) = 4
- New equilibrium price (P^*) = 60
- Interpretation: Demand for widgets increased!
Supply Shift Example:
- After a factory burns down, supply equation: P = 10 + 30Q_s
- New equilibrium quantity (Q^*) = 2
- New equilibrium price (P^*) = 70

Price Elasticity of Demand:
- Describes the responsiveness of quantity demanded to a price change, analyzed in terms of demand curve slope.
- A steep demand curve indicates a large price rise while a flat curve indicates a small price rise.
Measurement of Elasticity:
- Express the change in price and quantity as percentages:
1. Change in price as a percentage of the average price.
2. Change in quantity demanded as a percentage of the average quantity demanded.
Example Calculation:
- Initial price of pizza = $20.50, quantity demanded = 9 pizzas/hour
- New price = $19.50, quantity demanded = 11 pizzas/hour.
Calculating Price Elasticity of Demand (PED):
- Average price = $20
- Average quantity = 10 pizzas/hour
- ext{Percentage change in quantity demanded} = rac{2}{10} imes 100 = 20 ext{%}
- ext{Percentage change in price} = rac{-1}{20} imes 100 = -5 ext{%}
- Price Elasticity of Demand = rac{20 ext{%}}{-5 ext{%}} = -4

Closeness of Substitutes: Closer substitutes mean more elastic demand. For example, luxury goods tend to have elastic demand compared to necessities.
Proportion of Income Spent: Higher spending on a good often translates to more elastic demand.
Time Elapsed since Price Change: The longer people have to adapt, the more elastic demand becomes.

Demand varies in elasticity along the same demand curve.
At the midpoint, demand is unit elastic. Elasticity changes above and below the midpoint.
Example Calculation: If price drops from $25 to $15, quantity rises from 0 to 20 pizzas/hour, demonstrating various elasticity scenarios.

Total revenue = price × quantity sold.
The change in total revenue post price change depends on demand elasticity:
- Elastic demand leads to increased total revenue with a price cut.
- Inelastic demand leads to decreased total revenue with a price cut.
Total Revenue Test:
- Observing changes in total revenue due to price changes provides insight into elasticity of demand.
- Total Revenue maximization occurs when demand is unit elastic.

Income Elasticity of Demand: Measures changes in quantity demanded relative to changes in income.
- Income elasticity > 1: Income elastic (normal good).
- Income elasticity < 1: Income inelastic (normal good).
- Income elasticity < 0: Inferior good.
Cross Elasticity of Demand: Assesses responsiveness of the demand for one good when the price of another good changes.
- Positive for substitutes; negative for complements.

Definition:
Elasticity of supply measures responsiveness of quantity supplied to price changes.
Formula:
ext{Elasticity of Supply} = rac{ ext{Percentage change in quantity supplied}}{ ext{Percentage change in price}}
Characteristics of Supply Elasticity:
- Perfectly inelastic supply (vertical line, elasticity 0).
- Perfectly elastic supply (horizontal line, infinite elasticity).
Determinants of Supply Elasticity:
- Resource substitution possibilities increase elasticity.
- Time frames increase elasticity over time, from momentary (perfectly inelastic) to long-term (most elastic).

Glossary of Key Elasticity Types:
- Tables summarizing ranges for price elasticities of demand, income elasticities, cross elasticities, and their implications.

Analyzing specific instances such as price change assessments for tomatoes, smoothies, and muffins to assess demand elasticity through percentage changes and elasticity calculation.