Consumer Theory and Elasticity of Demand and Supply

… a core topic in Economic Analysis and Atlas102

ElasticityWarOnDrugs

Topic description

Elasticity captures how much the quantity demanded or supplied changes when price changes.

The topic covers determinants of elasticity such as availability of substitutes, time horizon, classification of goods, nature of goods (is it a necessity or a luxury?), and the size of the purchase relative to the consumer’s budget.

The treatment of this topic on the Atlas follows almost precisely that in Chapter 3, Elasticity and Its Applications, of the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics, accessed 21 April 2016).

Topic learning outcome

Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of elasticity of demand and supply, including following core concepts.

Core concepts associated with this topic

(Concepts with MRU videos in first column; terms from consumer theory in second and third columns)

Elasticity of Demand

Midpoint Formula for Elasticity

Elasticity of Demand and Total Revenue

Elasticity of Supply

Consumer Theory

Assumption of Convex Preferences

Assumption of Monotonic Preferences

Assumption of Transitive Preferences

Budget Line

Corner Solution

Engel Curve

Income Effect

Income Offer Curve

Indifference Curve

Isoquant

Isowelfare Curve

Law of Diminishing Marginal Utility

Marginal Utility

Marginal Rate of Substitution

Marginal Rate of Transformation

Monotonic Transformation

Ordinary Good

Reservation Price

Substitution Effect

Readings

We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 79 minutes of MRU course videos listed below (all accessed 21 April 2016) and doing the 39 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.

Atlas pages: Elasticity of Demand and Supply and its associated Concepts.

Alex Tabarrok, Elasticity of Demand, Principles of Economics – Microeconomics, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-demand-definition at (14 minutes).

Alex Tabarrok, Calculating the Elasticity of Demand, Principles of Economics – Microeconomics, at http://www.mruniversity.com/courses/principles-economics-microeconomics/calculate-elasticity-demand-formula (16 minutes).

Alex Tabarrok, Elasticity of Supply, Principles of Economics – Microeconomics, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-supply-midpoint-formula, (14 minutes).

Alex Tabarrok, Elasticity and Slave Redemption, Principles of Economics – Microeconomics, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-example-slave-redemption-sudan (5 minutes).

Alex Tabarrok, The Demand Curve Shifts, Principles of Economics – Microeconomics, at http://www.mruniversity.com/courses/principles-economics-microeconomics/demand-curve-shifts (14 minutes).

Alex Tabarrok, Applications Using Elasticity, Principles of Economics – Microeconomics, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-examples-applications (16 minutes).

Textbook readings in MPP and MPA courses 

University of Toronto: PPG-1002 Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. (Chapter 3 (Pp. 34-56))

Carleton University: PADM-5111 Frank, Robert, Ian Parker, and Igela Alger. Microeconomics and Behaviour, 5th Canadian Edition. New York: McGraw-Hill, 2013 (Chapter 5)

Harvard Kennedy School: API-101 Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012 (Chapter 3 and 4)

NYU Wagner: GP-1018 Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011. (Chapter 21)

Johnson-Shoyama: JS-805 Krugman, Paul, Robin Wells, and Anthony Myatt. Microeconomics: 1st Canadian Edition. London: Worth Publishers, 2006. (Chapter 10)

Ford School of Public Policy: Public Policy 555  Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition. Upper Saddle River: Patience-Hall, 2007 (Chapter 3)

George Washington: PPPA-6003 Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011. (Chapter 5)

American: PAUD-630 Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. (Chapter 4, 7, and 8)

UCLA: PLC-201 Goolsbee, Austan, Steven Levitt, and Chad Syverson. Microeconomics. New York:  Worth Publishers, 2013 (Chapter 4)

Rutgers- Economics in Public Policy Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition.  Upper Saddle River: Patience-Hall, 2007 (Chapter 3 and 4.1)

Assessment questions (from MRU Practice Questions for Chapter 3)

See http://www.mruniversity.com/node/186776 and http://www.mruniversity.com/node/186777, accessed 28 April 2016.

AQ102.03.01. Which of the following two goods is more likely to be inelastically demanded?

a. D

AQ102.03.10. If the elasticity of demand for college textbooks is -0.1, and the price of textbooks increases by 20%, how much will the quantity demanded change, and in what direction?

AQ102.03.23. Which of the two goods is more likely to be elastically supplied?

AQ102.03.32. For which of the following products would you expect the largest increase in price for the same increase in demand?

AQ102.03.36. Suppose that drug addicts pay for their addiction by stealing: So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic?

Page created by: Ian Clark, last modified on 18 May 2016.

Image: Minute 13:39 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/calculate-elasticity-demand-formula, accessed 19 April 2016.