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Copyright Mark Van Couwenberghe, 2017 87 HOPE YOU ENJOYED THE AUTUMN HOLIDAYS Now, let Copyright Mark Van Couwenberghe, 2017 87 HOPE YOU ENJOYED THE AUTUMN HOLIDAYS Now, let us 1. refresh our memories on “price elasticity” and 2. add some knowledge And 3. then we will build a bridge to a new chapter Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Price elasticity a small game to train our memories Copyright Mark Van Couwenberghe, 2017 Price elasticity a small game to train our memories 1 Complete the definition of price elasticity of demand (using the concepts below) 88 SCORE: /1 Price elasticity of demand measures the ………………. . change in ………………… of the ………………. . as a reaction to a ………………. . change in ………………. . 1. consumer Rehearsal price relative demand relative PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 89 1. 2 Which of these demand curves shows Copyright Mark Van Couwenberghe, 2017 89 1. 2 Which of these demand curves shows an inelastic demand? SCORE: /2 Demand 1. Explain why? Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 90 3 Shop owner A increases the price of Copyright Mark Van Couwenberghe, 2017 90 3 Shop owner A increases the price of apples from 4 € 0, 70 to € 0, 80. Demand decreases from 5 16 to 14 kg. Shop owner B increases the price of apples 6 from € 0, 65 to € 0, 72. Demand decreases from 24 to 21 kg. SCORE: /3 7 Which shop owner has the most price-elastic customers? 1. Explain why? Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 4 Below you will find a number of products. Copyright Mark Van Couwenberghe, 2017 4 Below you will find a number of products. Will the demand for the products be rather elastic or inelastic? 91 SCORE: /4 Product E / I Your explanation bread product with many substitutes house repair on short term product with few substitutes product with low share in household expenditure (daily food) sports car product with high share in household expenditures (holiday trips) cigarettes house repair on long term Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 92 1. 5 What is the price elasticity of Copyright Mark Van Couwenberghe, 2017 92 1. 5 What is the price elasticity of demand in this case? SCORE: /5 1. Explain why? Rehearsal PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Price elasticity you should also know these 3 things… Copyright Mark Van Couwenberghe, 2017 Price elasticity you should also know these 3 things… 93 1 Suppliers are very much interested in knowing the price elasticity of their product (fill-in the blank spaces) demand is elastic 2 supplier increases the price supplier decreases the price Extra info on price elasticity demand is inelastic customers will buy a lot less >>> turnover decreases P x Q customers will buy not much more >>> turnover decreases P x Q PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 94 1. 2 The University of Leuven performed some Copyright Mark Van Couwenberghe, 2017 94 1. 2 The University of Leuven performed some research on price elasticity of demand; the university calculated the price elasticity for some products 2. Can you link the product to the right price 1 elasticity? public transport A 1, 63 2 hygiene/health products B 0, 53 3 restaurant dinners C 0, 42 4 cultural activities D 0, 54 E 1, 00 F 0, 30 G 1, 08 5 daily food 1 6 energy (house) 7 cigarettes The right combinations are: 1 Extra info on price elasticity 2 3 4 5 6 7 PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 3 Besides the price elasticity of demand, we can Copyright Mark Van Couwenberghe, 2017 3 Besides the price elasticity of demand, we can also mention the 4 5 95 “income elasticity of demand” definition: the relative change in demand of the consumer as a reaction to a relative change in income 6 formula: % change demand 7 ________ 8 % change income 9 1. normally: higher income means more consumption 2. Extra info on price elasticity but the type of product will also be important PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 96 income elasticity what type of product? + example Copyright Mark Van Couwenberghe, 2017 96 income elasticity what type of product? + example explanation <0 01 Engel's law is an observation in economics stating that as income rises, the proportion of income spent on necessity goods falls, even if absolute expenditure rises. In other words, the income elasticity of demand of necessity goods is between 0 and 1. Extra info on price elasticity PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Let’s now build a bridge to a new chapter Copyright Mark Van Couwenberghe, 2017 Let’s now build a bridge to a new chapter 97 We know all about: - Competitive markets The price mechanism on competitive markets Price elasticity and income elasticity But is the market price always the “right” price? governments sometimes think the market price is not right And they will do something about it… Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Government interventions on the market (price regulation): “Binge drinking” Copyright Mark Van Couwenberghe, 2017 Government interventions on the market (price regulation): “Binge drinking” 98 https: //www. youtube. com/watch? v=q. A 2 yfl 4 LB 6 E Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Let’s answer some basic questions: 99 1 What is Copyright Mark Van Couwenberghe, 2017 Let’s answer some basic questions: 99 1 What is the definition of “binge drinking”? 2 What problems does it create - on short term? - on long term? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 100 3 What is the decision of the government Copyright Mark Van Couwenberghe, 2017 100 3 What is the decision of the government in the battle against “binge drinking”? + what is the effect? 4 What could be a negative aspect of this decision? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Minimum price 101 If a government considers the market Copyright Mark Van Couwenberghe, 2017 Minimum price 101 If a government considers the market price of a product being TOO LOW, because the consumption creates problems at the scale of the whole society, they can decide to set a MINIMUM PRICE Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Situations 102 Let us look at the following situations: Copyright Mark Van Couwenberghe, 2017 Situations 102 Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Situations 103 Let us look at the following situations: Copyright Mark Van Couwenberghe, 2017 Situations 103 Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Situations 104 Let us look at the following situations: Copyright Mark Van Couwenberghe, 2017 Situations 104 Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Situations 105 Let us look at the following situations: Copyright Mark Van Couwenberghe, 2017 Situations 105 Let us look at the following situations: what? why would intervention be needed? Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

Copyright Mark Van Couwenberghe, 2017 Government intervention: overview 106 Government intervention 1 Minimum price Copyright Mark Van Couwenberghe, 2017 Government intervention: overview 106 Government intervention 1 Minimum price 2 Maximum price 3 Taxes 4 Subsidies 5 Quota Government interventions: introduction PRICE MECHANISM ON COMPETITIVE MARKETS

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