文档介绍：Chapter 2 Theoretical Tools
Hope you still remember them…
We are skipping “Constrained utility maximization”
…if your memory of this tool is blurred, I suggest reading section and in the text, or your intermediate microeconomics book for more details.
EQUILIBRIUM AND SOCIAL WELFARE
Welfare economics is the study of the determinants of well-being, or welfare, in society. It depends on:
Determinants of social efficiency, or size of the economic “pie.”
Redistribution.
EQUILIBRIUM AND SOCIAL WELFARE Demand curves
Demand curve is the relationship between the price of a good and the quantity demanded.
Demand curve is derived from utility maximization problem.
Figure 19
Deriving the Demand Curve for Movies
QM
PM
QM,3
Demand curve for movies
At a high price for movies, demanded QM,3
PM,3
At a somewhat lower price for movies, demanded QM,2
QM,2
PM,2
At an even lower price for movies, demanded QM,1
QM,1
PM,1
binations of points like these create the demand curve.
EQUILIBRIUM AND SOCIAL WELFARE Elasticity of demand
A key feature of demand analysis is the elasticity of demand. It is defined as:
That is, the percent change in quantity demanded divided by the percent change in price.
For example, an increase in the price of movies from $8 to $12 is a 50% rise in price.
If the number of movies purchased fell from 6 to 4, there is an associated 33% reduction in quantity demanded.
The demand elasticity is therefore -.
Demand elasticities features:
Typically negative number.
Not constant along the demand curve (for a linear demand curve).
For a vertical demand curve
Elasticity of demand is zero—quantity does not change as price goes up or down.
Perfectly inelastic
For a horizontal demand curve
Elasticity of demand is negative infinity—quantity changes infinitely for even a small change in price.
Perfectly elastic
Figure 20 illustrates this.
Figure 20
Perfectly Elastic and Perfectly Inelastic Demand
QM
PM
QM,3
Inelastic demand curve for mo