Robert hall s economics, principles applications
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Robert hall s economics, principles applications
EconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications y ripm^ndpd (per Month) (Q)Total Monthly Fipendhure (PxQ)EFFECTS OF PRICE CHANGES FOR LAPTOP COMPUTERS1003ÔOO.OCOSCOOmiỉonSI.UWyju.uwS/bU million30032’30,ocoS600mdkcnS3 503100S350 millionprice X quantity Si,000 X 600,000 $600 million. But this is exactly equal to dir «/ Robert hall s economics, principles applications wliich lias a width of 600.000 and a height of Si.000. Thus, the area of this rectangle shows total expenditure on the good when price IS $ 1,000. MoRobert hall s economics, principles applications
re generally,At any point I in a demand curve, buyers’ total expenditure is the area of a rectangle with width equal to quantity demanded and height eEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications 00. Here, total expenditure is S1.500 X 500.000 - $750 million, given by the area of the taller rectangle, with width equal to 500,000 and height equal to s 1,500. You can see that the area of the total expenditure rectangle drawn for price $1,500 IS larger than the area of the total expenditure rec Robert hall s economics, principles applications tangle for price ■ $1,000. This confirms what we know already from Tnble 2: The rise in price from s 1,000 to $1,500 causes total expenditure to increRobert hall s economics, principles applications
ase because demand is inelastic lor that price change.FIGURESAny punt dung a demand curve defines a rectangle whose area indicates total expenditure oEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications from A to s, tJiperidituie increases, so demand must be inelastic uver that Iđige.98Chapter 4 Working Willi Supply and IX-rnandFinally, there is one important implication of our elasticity-total expenditure rule. What a buyer spends, a seller receives. Therefore, the total amount that consumers spe Robert hall s economics, principles applications nd on a good—which we’ve called total expenditure—is also rhe total sales revenue of sellers. This is one reason why knowing (he price elasticity of dRobert hall s economics, principles applications
emand for their product can be so important to firms. In some cases, the price elasticity of demand IS all a firm needs to forecast Its future revenueEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications ral goods and services. Keep in mind that these elasticities are calculated for a specific range of prices that have been observed in the past. If a large price change moved us out of (lie range of past observations, the elasticity might be very different. For example, although the elasticity of dem Robert hall s economics, principles applications and for gasoline IS —0.20 when (he price varies in a range from $1.00 to $2.00 per gallon, the elasticity might be very different for price changes inRobert hall s economics, principles applications
a range from $10.00 to $15.00 per gallon, which have never been observed.Notice that all of rhe price elasticities of demand arc negative: Each of thEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications y of cigarettes demanded.You can also see that the calculated elasticities vary widely. Why is It that demands for Tide detergent, Pepsi, and Coke are so elastic, while those for eggs and gasoline are so inelastic? More generally, what determines whether the demand for a g(M)d will be clastic or ine Robert hall s economics, principles applications lastic? Two characteristics seem to Ik* the most important determinants of elasticity: the availability of substitutes, and the importance in (he buyeRobert hall s economics, principles applications
rs’ budget.Availability of Substitutes. When the price of a good rises, we look for substitutes. If close substitutes arc easy to find, we can cur bacEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications demand is less elastic.This logic helps explain some of the differences in elasticity values found in Fable 3. In spite of what (he commercials tell US, most of US recognize (hat Goke is an extremely close substitute for Pepsi (and vice versa). And there are a variety of other reasonably close subst Robert hall s economics, principles applications itutes for Pepsi, such as other carbonated soft drinks, iced tea, or fruit juice. This helps to explain why a 10-pcrccnt rise in rhe price of Pepsi woRobert hall s economics, principles applications
uld lead to more (han a 20-percent decline in quantity demanded. By contrast. there are fewer close substitutes for eggs—especially if you are baking EconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications stitutability can be a slippery concept, however, and we need to be careful when we use it. Remember that, in analyzing any problem, the first Key Step of our four-step procedure IS to define the market we arc dealing with. You may also remember that we can choose to define a market in different way Robert hall s economics, principles applications s, depending on (he question we want to analyze. Blit it turns out that the elasticity value we will use in analyzing a problem depends crucially on hRobert hall s economics, principles applications
ow broadly or narrowly we define the market Itself. After all, it IS easier to find substitutes for a narrowly defined good (Pepsi) (han for a broadlyEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications for the good. The more broadly we define a good, the harder it is to find substitutes and the less elastic is the demand for the good.PtKv Elastkáy of IXrmand99The key is that different things arc assumed constant when we use a narrow definition compared with a broader definition. Once we define th Robert hall s economics, principles applications e good in question, our elasticity cakIllations always assume that all other prices do not change. Pepsi has a large price elasticity because when theRobert hall s economics, principles applications
price of this particular soft drink rises, we consider the effect on quantity demanded, assuming that the prices of all other soft drinks, including EconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications But suppose we had defined our good more broadly as carbonated soft drinks. Now. any price increase would apply to Pepsi, Coke, and all soft drinks at the same time. While It IS still possible to substitute other drinks in place of soft drinks, it is not as easy AS substituting one soft drink for an Robert hall s economics, principles applications other. So we expect the more aggregated Item, soft drinks, to have a much lower price elasticity of demand. (Now look at rhe elasticity entry for TideRobert hall s economics, principles applications
detergent. Suppose the good had instead been defined as “laundry detergent." Would you expect a larger or smaller elasticity value?)Table 3 also showEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)Quantity Robert hall s economics, principles applications end to be lower. There are very few substitutes for food in general. Although many people can cat less, it IS not an easy adjustment to make. The same IS true for other broad categories, such as recreation, transportation, and clothing.The ability to find substitutes for goods also depends on our ta Robert hall s economics, principles applications stes. Goods that we think of as necessities—for example, medical care, food, and housing—are100EconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)QuantityEconomicsPrinciples and ApplicationsRobert E. Hall Marc LiebermanUPDATED BCCŨNO EDITIONP1KV El.istkxv <»f DenMild97TABLE 2Price per Laptop (P)QuantityGọi ngay
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