1. %change in X -Inflation -Elasticity

2. GDP/Inflation Inflation rate is measured by using a price index for two years. The consumer price index may give a value of goods for year X1 and another value for year X2. The equation is: (Index for X2 – Index for X1) / Index for X1 x 100 Example problem: Average index for year X1 is 104 and average index for year X2 is 108 The inflation rate is (108 – 104) / 104 x 100 = 3.85%

3. However, this calculation is very simplistic. Categories within the CPI are weighted, and this has to be taken account of in calculation for inflation. Inflation rate = 141.3 – 133 / 133 x 100 = 6.24% CategoryIndex for year X1 WeightIndex for X1 times weight Index for year X2 WeightIndex for X2 times weight Housing1400.5701500.575 Foodstuff1320.339.61410.342.3 Clothing1170.223.41200.224 Totals1.01331.0141.3

4. Definitions GDP: The monetary value of the aggregate output of an economy Nominal GDP: The GDP of a country in current prices or market value of a nation’s output Real GDP: GDP that has been adjusted for inflation to a base- year price Inflation: A persistent increase in the average price level in the economy Consumer Price Index (CPI): A weighted price index of goods and services typically purchased by urban consumers.

5. Definition Price Elasticity of Demand (PED): Measures how much quantity demanded of a product changes when there is a change in the price of a product. Cross Elasticity of Demand(XED): Measures how much the demand for a product changes when there is a change in the price of another product. Income Elasticity of Demand (YED): Measures of how much the demand for a product changes when there is a change in the consumer’s income. Price Elasticity of Supply (PES): Measures how much the supply of a product changes when there is a change in the price of a product.

6. How to calculate PED= Percentage Change in Quantity Demanded/ Percentage change in Price PES= Percentage Change in Quantity Supplied/ Percentage Change in Price XED= Percentage Change in quantity of Product X/ Percentage Change in price of Product Y YED= Percentage change in quantity demanded of product/ Percentage change in income of consumer

7. Elasticity Equations Percentage Change in Quantity Demanded = (Qd 2 - Qd 1 /Qd 1 ) *100 Percentage Change in Price of Product= (P 2 - P 1 /P 1 )*100 Percentage Change in Consumer Income = (I 2 - I 1 /I 1 )*100 Percentage Change in Quantity Supplied= (Qs 2 - Qs 1 /Qs 1 )*100

8. Question PED Question: When a firm discovers that when they lower the price of one of their monthly magazines from $5-$4.5, the number of magazines that are bought by customers each month rises form 200,000 to 230,000. Calculate the PED.

9. Answer Calculate percentage change in quantity demanded ((230,000-200,000)/200,000)*100 (30,000/200,000)*100 = 15% Calculate percentage change in Price. ((4.50-5.00)/5.00) *100 (-.5/5.00)*100 = -10% PED= 15% / -10% = -1.5 Ignore negative value PED is 1.5, so it is Elastic.

10. Question XED Question: Price of Burger lowers from, $2.0 to $1.8. As a result, the number of pizza slices that a different shop owner falls from 400 to 380. Find the XED for the pizza slices.

11. Answer Calculate percentage change in quantity demanded ((400-380)/400)*100 (-20/400)*100 = -5% Calculate percentage change in Price of Y ((2-1.8)/2) *100 (-.2/2)*100 = -10% XED= -5% / -10% = 0.5 Because XED is positive, two goods are substitutes of each other.

12. Question YED Question: Person’s annual income increase from $60,000 per year to $66,000 per year. Person increases annual spending on holidays from $2,500 to $3,000. Find her income elasticity of demand for holidays.

13. Answer Percentage change in Quantity demanded of holidays ((3,000-2,500)/2,500)*100 (500/2,500)*100 = 20% Calculate percentage change in income ((66,000-60,000)/60,000)*100 (6,000/60,000)*100 = 10% YED= 20% / 10 % = 2 Positive value, so good is a normal good. Value is also above 1, so the good is demand is income-elastic.

14. Question PES Question: Magazine prices change from $5.00 to $5.50. The magazine firm’s supply increases fro, 200,000 to 230,000 magazines per month. Calculate PES.

15. Answer Calculate percentage change in quantity supplied ((230,000-200,000)/200,000)*100 (30,000/200,000)*100 = 15% Calculate percentage change in price. ((5.5-5.0)/5.0)*100 (.5/5.0)*100 = 10% PES= 15% / 10% = 1.5 PES is positive and above 1, so supply is elastic.