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The Effects of Price Elasticity of Demand September 23, 2008

Posted by petrarcanomics in Markets: Supply & Demand, More Markets & Elasticity.
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Elasticity has profound real-world effects on the way businesses price their products. Price and quantity of demand have an inverse relationship.

If a product is price inelastic, it means that a change in price will cause a smaller relative change in quantity, meaning that an increase in price will dominate the decrease in quantity causing a price increase to lead to a total revenue increase. A decrease in price will dominate the increase in quantity causing a price decrease to lead to a total revenue decrease.

If a product is price elastic, it means that a change in price will cause a larger relative change in quantity, meaning that an increase in price will be dominated by the decrease in quantity causing a price increase to lead to a total revenue decrease. A decrease in price will be dominated a larger quantity increase causing a price decrease to lead to a total revenue increase.

If a price is unit elastic to its demand, then a price increase or decrease will cause no change in total revenue because the change in price will be equally balanced with a commensurate change in quantity.

For more on elasticity of demand, see Reffonomics.

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The Effects of Supply and Demand September 23, 2008

Posted by petrarcanomics in Markets: Supply & Demand, More Markets & Elasticity.
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A demand increase will cause a shift to the right in the demand curve, causing both price and quantity to increase. A demand decrease will cause a shift to the left in the demand curve, causing both price and quantity to decrease.

A supply increase will cause a shift to the right in the supply curve, causing price to decrease and quantity to increase. A supply decrease will cause a shift to the left in the supply curve, causing price to increase and quantity to decrease.

More on Markets (Unit 2 Contd.) September 23, 2008

Posted by petrarcanomics in More Markets & Elasticity.
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Markets arrive at equilibriums of quntity demanded and quantity supplied, setting a market price and quantity. When quantity demanded is greater than quantity supplied markets experience shortage and inventories are low. They generally move back to equilibrium by raising price to elimintate that shortage.

When quantity supplied is greater than quantity demanded, markets experience a surplus, and inventories are high. Markets generally lower price in order to alleviate the surplus and move back to equilbrium.

Sometimes market mechanisms are not allowed to work when government imposes price ceilings and price floors.

Price ceilings are government mandated maximum limits on the price of a particular good. If these are set below equilibrium price they will create shortages. Above equilibrium price, a price ceiling is of no consequence as the equilibrium price will allocate the quantity supplied of a good.

Price floors are a government imposed minimum limit on prices which does not allow producers to charge any price below the floor price. Floors imposed above equilibrium will create surpluses. Price floors below equilibirum are of no consequence as the equlibirum price will allocate the quantity supplied of a good.

For more information on shortages, surpluses, and price floors and ceilings, see Reffonomics.