Price Elasticity of Supply Consumer Preferences
Price Elasticity of Supply Consumer Preferences
Price Elasticity of Supply Consumer Preferences
Lecture 4
Outline
1. Chap 2: Elasticity - Price Elasticity of Supply
=
.
In the short run, if price increases, firms will want to produce more but cannot
hire workers and buy machines immediately, thus the supply is less elastic. In
contrast, supply is more elastic in the long run.
Example (Example in Elasticities of Demand). Assume the quantity demanded is
QD = 14 − 3P + I + 2PS − PC .
• P - Price
• I - Income
• PS - Price of substitute
• PC - Price of complement
Calculate and EQPC when P = 1, I = 10, PS = 2 and PC = 1.
Solution:
Given the values of variables, the quantity demanded is:
QD = 14 − 3 × 1 + 10 + 2 × 2 − 1 = 24.
The elasticities are
2 Consumer Preferences 2
1
= ,
24
I dQ 10 5
EI = = × 1 = , Q dI 24 12
EQPS = PS dQ = 2 × 2 = 1 ,
Q dPS 24 6
EQPC = PC dQ = 1 × (−1) = −
1 . Q dPC 24 24
2 Consumer Preferences
Consumerpreferences
Consumerbehavior =⇒
Budgetconstraints • What amount and types
of goods will be purchased.
• Origin of demand, how to decide demand.
Topics
1. Preference
Preference
Notation
B: A is preferred to B.
A B: A is indifferent to B.
• MRS decreasing.
• Preferred set is convex.
• The left one in Figure 2 makes more sense in the real world.
Example (Perfect complements). Buying shoes. People need both the left one
and the right one.
2 Consumer Preferences 5
Utility Functions
Utility function. Assigns a level of utility to each basket of consumption.
Example (A sample utility function).
u(x,y) = xy.