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{{Economics_Lectures}}

<br>{{Economics_Lectures}}

Recall that a "free market" is one where there is no interference by government with the price and quantity of goods sold.  In a free market, government does not regulate the price or limit the quantity.  

Recall that a "free market" is one where there is no interference by government with the price and quantity of goods sold.  In a free market, government does not regulate the price or limit the quantity.  

*A fall in price tends to increase the quantity demanded by the public, and a rise in price tends to decrease the quantity demanded. '''LOWER PRICE MEANS HIGHER QUANTITY DEMANDED''' (and higher price means a lower quantity demanded).  This is known as the '''Law of Demand''': the quantity demanded changes inversely with price.

*A fall in price tends to increase the quantity demanded by the public, and a rise in price tends to decrease the quantity demanded. '''LOWER PRICE MEANS HIGHER QUANTITY DEMANDED''' (and higher price means a lower quantity demanded).  This is known as the '''Law of Demand''': the quantity demanded changes inversely with price.

*When the quantity demanded exceeds the quantity supplied at a given price, the price tends to rise as sellers take advantage of the high quantity demanded by increasing price.  Similarly, when the quantity supplied exceeds the quantity demanded, the price tends to decrease as sellers try to sell their unsold goods.     

*When the quantity demanded exceeds the quantity supplied at a given price, the price tends to rise as sellers take advantage of the high quantity demanded.  Similarly, when the quantity supplied exceeds the quantity demanded, the price tends to decrease as sellers try to sell their unsold goods.     

*Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: '''EQUILIBRIUM IS WHERE QUANTITY SUPPLIED EQUALS QUANTITY DEMANDED'''.

*Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: '''EQUILIBRIUM IS WHERE QUANTITY SUPPLIED EQUALS QUANTITY DEMANDED'''.

How much more revenue does the team make by increasing the price?  Revenue is price times quantity.  If the original ticket price was P and the original quantity of tickets sold was Q, then initial revenue is P multiplied by Q (P times Q, or PxQ, or PQ).  After the price increase, the revenue is (1.20 x P) x (.95 x Q) = 1.14PQ.  Revenue has thus increased 14% simply by increasing the price.  That explains why ticket prices for professional sports keep increasing, and why the luxury boxes are so expensive.  The price elasticity of demand for professional sports (particularly football) is low.  The fans still want to watch, no matter how expensive it gets.  Of course, a higher price does cause some decrease in demand, but not much of a decrease.

How much more revenue does the team make by increasing the price?  Revenue is price times quantity.  If the original ticket price was P and the original quantity of tickets sold was Q, then initial revenue is P multiplied by Q (P times Q, or PxQ, or PQ).  After the price increase, the revenue is (1.20 x P) x (.95 x Q) = 1.14PQ.  Revenue has thus increased 14% simply by increasing the price.  That explains why ticket prices for professional sports keep increasing, and why the luxury boxes are so expensive.  The price elasticity of demand for professional sports (particularly football) is low.  The fans still want to watch, no matter how expensive it gets.  Of course, a higher price does cause some decrease in demand, but not much of a decrease.

Let’s take another example.  Suppose that airlines increase the price on their flights from New York to Florida from an average of $300 per seat to $500 per seat.  That is a 67% increase.  What would that do to the tourist traffic to Florida from New York?  It takes only a day and a half to drive to Florida, which incurs gas charges of perhaps $125 and a hotel charge of perhaps $80.  Many tourists would likely drive rather than pay the higher fares.  Due to the price increase, the demand for these higher-priced airline tickets could fall by 75%, assuming that many of the ticket-buyers are tourists rather than people traveling for their job.

Let’s take another example.  Suppose that airlines increase the price on their flights from New York to Florida from an average of $300 per seat to $500 per seat.  That is a 67% increase.  What would that do to the tourist traffic to Florida from New York?  It takes only a day and a half to drive to Florida, which incurs gas charges of perhaps $125 and a hotel charge of $80.  Many tourists would likely drive rather than pay the higher fares.  Due to the price increase, the demand for these higher-priced airline tickets could fall by 75%, assuming that many of the ticket-buyers are tourists rather than people traveling for their job.

What is the price elasticity of this demand?  The percent change in quantity demanded is -75% (3/4) and the percent change in price is 67% (2/3), so the elasticity is -3/4 divided by 2/3 = -9/8.  The sign is dropped so the elasticity is expressed as 9/8.  It is greater than 1, and thus is described as having an “elastic demand” rather than an “inelastic demand” (inelastic demand is a value less than 1).  When the price elasticity of demand equals 1, then it is called “unit elasticity of demand.”

What is the price elasticity of this demand?  The percent change in quantity demanded is -75% (3/4) and the percent change in price is 67% (2/3), so the elasticity is -3/4 divided by 2/3 = -9/8.  The sign is dropped so the elasticity is expressed as 9/8.  It is greater than 1, and thus is described as having an “elastic demand” rather than an “inelastic demand” (inelastic demand is a value less than 1).  When the price elasticity of demand equals 1, then it is called “unit elasticity of demand.”

Once you grasp the price elasticity of demand, you’ll see that you can describe the elasticity (or responsiveness) of many other variables in economics.

Once you grasp the price elasticity of demand, you’ll see that you can describe the elasticity (or responsiveness) of many other variables in economics.

Someone's income, like someone’s salary at his job (only about $7.50 an hour at McDonald's), affects his demand for goods.  More Mercedes-Benz luxury cars will sell when the average income increases than when it decreases.  So economists find it useful to describe the “income elasticity of demand,” which is the percentage change in quantity demanded divided by the percentage change in income.

Someone's income, like someone’s salary at his job (only about $7.50 an hour at McDonald's), affects his demand for goods.  More Mercedes-Benz luxury cars will sell when the average income increases than when it decreases.  So economists find it useful to describe the '''''“income elasticity of demand,” which is the percentage change in quantity demanded divided by the percentage change in income'''''.

Most goods sell in greater quantities when the income of buyers increases.  We all tend to go to restaurants more often, buy new clothes more often, and pay more for goods and services when we our income increases.  When our income declines, we reduce our purchases.

Most goods sell in greater quantities when the income of buyers increases.  We all tend to go to restaurants more often, buy new clothes more often, and pay more for goods and services when we our income increases.  When our income declines, we reduce our purchases.

Based on the above example, most economists view "trade" (buying and selling goods and services with others) as increasing wealth.  Whenever two people enter into a transaction in the free market, each side should be benefiting and increasing their wealth.  When you buy milk at a grocery store, you are paying less than what the milk is really worth to you, or you would not spend time buying it.  You make your purchase because it helps you.  The store is making money from the milk, or it would not bother trying to sell it.  So the store also becomes wealthier from the transaction.  The overall wealth of society is increased by these transactions.  The more transactions, the greater the wealth.  It seems clear that trade within a country, like the examples just described, are to be encouraged because they increase the wealth of both the buyers and the sellers.

Based on the above example, most economists view "trade" (buying and selling goods and services with others) as increasing wealth.  Whenever two people enter into a transaction in the free market, each side should be benefiting and increasing their wealth.  When you buy milk at a grocery store, you are paying less than what the milk is really worth to you, or you would not spend time buying it.  You make your purchase because it helps you.  The store is making money from the milk, or it would not bother trying to sell it.  So the store also becomes wealthier from the transaction.  The overall wealth of society is increased by these transactions.  The more transactions, the greater the wealth.  It seems clear that trade within a country, like the examples just described, are to be encouraged because they increase the wealth of both the buyers and the sellers.

The term "free trade" refers to transactions between two different countries, as in trade between China and the United States.  Trade with a foreign government makes it wealthier.  We may also become wealthier from the transaction, but our gain is probably not as much as the foreign nation's benefit.  We may actually end up spending more money defending against the foreign government that we trade with, as our military defense costs may be greater than our benefit from the trade.  Or our money may be used by the foreign government to enslave its people, which we do not want.  We may be losing jobs because of our trade with foreign governments, as factories are built in the foreign nations rather than in our nation.  For most of the history of the United States "free trade" with foreign nations was not popular, but it has been increasingly used in recent years.  Wal-Mart, for example, imports many billions of dollars of low-cost goods directly from China, where they are produced by paying workers very little in wages.

The term "free trade" refers to transactions between two different countries, as in trade between China and the United States.  Trade with a foreign government makes it wealthier.  We may also become wealthier from the transaction, but our gain is probably not as much as the foreign nation's benefit.  We may actually end up spending more money defending against the foreign government that we trade with, as our military defense costs may be greater than our benefit from the trade.  Or our money may be used by the foreign government to enslave its people, which we do not want.  We may be losing jobs because of our trade with foreign governments, as factories are built in the foreign nations rather than in our nation.  For most of the history of the United States, "free trade" with foreign nations was not popular, but it has been increasingly used in recent years.  Wal-Mart, for example, imports many billions of dollars of low-cost goods directly from China, where they are produced by paying workers very little in wages.

'''''Ask yourself''''':  do you support "free trade" with hostile foreign countries?

'''''Ask yourself''''':  do you support "free trade" with hostile foreign countries?

3. Explain the  concept of income elasticity.

3. Explain the  concept of income elasticity.

4. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape.

4. In connection with price elasticity of demand, a nearly perfectly elastic demand curve is nearly ________ in shape, while a nearly perfectly inelastic demand curve is nearly __________ in shape.

5. '''''Why''''' is the name "necessity" given to a good that has an income elasticity of less than one, and the name "luxury" given to a good that has an income elasticity of more than one?

5. '''''Why''''' is the name "necessity" given to a good that has an income elasticity of less than one, and the name "luxury" given to a good that has an income elasticity of more than one?