4. These are good connective phrases
by contrast…
A consequence of
this might be …
therefore…
this might
mean…
on the other
hand…this is because
5. Diagrams matter!
Diagram must haves
Fully labeled
Original and new equilibrium
Demand and supply the correct way round
Well explained – you must explain why the
curve has shifted, in detail
Think about the elasticity – e.g. oil has
inelastic demand and supply
7. Elasticity Matters!
What do I need to know?
The definitions of each elasticity
The formula’s and be confident in using them
How to draw the diagrams
The determinants of PED and PES
Examples
Why they are important
8. Factors that Affect Price Elasticity
Necessity or
luxury?
Availability of
substitutes
Consumer
income
Brand loyalty
Habits
Frequency of
purchase
18. The price of Good X rises by 20 %. As a
result, the demand for a substitute Good Y rises
by 10 %. What is the cross-elasticity of demand
for Good Y with respect to Good X?
Cross price elasticity
19. The price of Good X rises by 20 %. As a result,
the demand for a substitute Good Y rises by 10
%. What is the cross-elasticity of demand for
Good Y with respect to Good X?
Xed = % change in DX / % change in PY
= +10% / +20% = +0.5
I.e. X and Y are weak substitutes
Cross price elasticity
20. Using Cross Price Elasticity
The table below gives estimates of the price
elasticity’s and cross-elasticities of demand for bus
and rail travel. What would be the change in the
volume of rail travel resulting from a 25% increase
in bus fares?
21. Using Cross Price Elasticity
The table below gives estimates of the price
elasticity’s and cross-elasticities of demand for bus
and rail travel. What would be the change in the
volume of rail travel resulting from a 25% increase
in bus fares? Answer: = +4% (+0.16 x 25)
23. Income elasticity of demand
• Normal goods – positive income elasticity
• Luxury goods – income elasticity > +1
• Necessities – income elasticity >0 and <+1
• Inferior products – negative income elasticity
• Counter cyclical goods – products whose
demand varies inversely to the
macroeconomic cycle – demand rises in a
downturn
26. Application of income elasticity
The table shows a
consumer's expenditure
on a range of goods at
different levels of
income. For which good
does the consumer
have an income
elasticity of demand
greater than zero, but
less than one?
27. Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ1
@tutor2u_econ