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3: Elasticities of Demand and Supply
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- Imagine yourself in an internship this summer. It is your first day on the job and your supervisor asks you to develop answers for the following questions:
- How does the demand for beef respond to changes in the price of beef?
- How does the demand for beef respond to changes in the prices of related goods such as pork, poultry, lamb, or fish?
- How does the demand for beef respond to a change in consumer income levels?
- How does the demand for beef respond to changes in advertising expenditures by the National Cattlemen’s Beef Association (NCBA)?
- Having just completed a course on food and agricultural marketing, you notice immediately that each of these questions pertains to a variable that can influence market demand. Question 1 deals with the own-price relationship, question 2 with cross-price relationships, question 3 with an income relationship, and question 4 with the potential for advertising expenditures to exert a favorable influence on consumer preferences.
- Interpret elasticity numbers and compute elasticities using both the point and arc formulas.
- Use demand elasticities to identify normal necessities, normal luxuries, inferior goods, substitutes, and complements in consumption.
- Describe factors that impact the magnitude of own-price demand elasticities.
- Show how the revenue implications of a price change depend on the own-price elasticity of demand.
- Use supply elasticities to identify competing products and joint products in production.
- 3.1: Overview and Objectives
- 3.2: Demand Elasticities
- 3.3: Computing Demand Elasticities
- There are occasions in this course where you will need to compute elasticities. There are two formulas used to do this. One is the point formula. The point formula will be most important for this course and is also most commonly in published studies on food demand. The other formula is called the arc or average formula. Let us spend some time on each.
- 3.4: Factors that Affect the Magnitude of Own Price Elasticities
- 3.5: Elasticities of Supply
- 3.6: Concluding Comments
- 3.7: Problem Sets