increases and decrease in demand higher demand leads to higher equilibrium price and higher...
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Increases and Decrease in Demand
• Higher demand leads to higher equilibrium price and higher equilibrium quantity supplied
• Lower demand leads to lower equilibrium price and lower equilibrium quantity supplied
Increases and Decreases in Supply
• Higher supply leads to lower equilibrium price and higher equilibrium quantity demanded
• Lower supply leads to higher equilibrium price and lower equilibrium quantity demanded
Supply and Demand Model PracticeAnswer the following on a separate sheet of paperSuppose we are analyzing the market for hot chocolate.
a) Winter starts and the weather turns sharply colder, consumers prefer hot chocolate. b) The price of cocoa beans, an ingredient in making hot chocolate, decreases. c) The Surgeon General of the United States announces that hot chocolate causes acne. d) Protesting farmers stop producing millions of gallons of milk, causing the price of milk, an
ingredient in hot chocolate to rise.
S
D
• Plot the schedule below, which represents the demand for water after a hurricane.
Price QD QS
$6 0 60
5 10 50
4 20 40
3 30 30
2 40 20
1 50 0
Activator Chapter 6
3.00
4.00
5.00
2.00
1.00
0 10 20 30 40 50 60
6.00
D
S
Price Ceiling
Price Ceilings
Price Ceiling – government imposed, legal maximum price that can be legally charged for a good/service
New York introduced rent control in the early 1940s as a way to provide affordable housing
Price ceiling causes a shortage in the amount of the product
Input CostsP
SS1
$7.25 x 40 hours = $290 $290 x 4 weeks = $1160 $1160 x 5 workers = $5800 $5800 x 12 months = $69,600
$9.00 x 40 hours = $360 $360 x 4 weeks = $1440 $1160 x 5 workers = $7200 $5800 x 12 months = $86,400
• Plot the schedule below, which represents the demand for laborers in the market.
Price QD QS
$7.25 0 60
6.25 10 50
5.25 20 40
4.25 30 30
2.25 40 20
1 50 0
Activator Chapter 6
4.25
5.25
6.25
2.25
1.25
0 10 20 30 40 50 60
7.25
D
SPrice Floor
Price Floor
Price Floor – government imposed, legal minimum price at which a good can be sold
Minimum wage is a well-known price floor Minimum wage can cause a surplus of workers
Price ceilingsEquilibrium Price ceiling
D
Quantity
Price
3
2
200
4
S
100
D
Quantity
Price
3
2
200 800
4
S
100
Price Ceiling
Shortage
800
Price controls: price floors
Equilibrium Price floor
D
Quantity of icecreams
Price
3
2
200
4
S
100
D
Quantity of icecreams
Price
3
2
200 600
4
S
100
Price Floor
600
Surplus
Minimum Wage Videos
Stossel 2012 (dvd) http://www.youtube.com/watch?v=sZUZ8oJ9rfQ&list=PL68F7227FEB
0AD808&index=2 http://www.youtube.com/watch?v=Ct1Moeaa-W8&list=PL68F7227FE
B0AD808&index=20
http://www.youtube.com/watch?v=pwFVx4SG4Co&list=PL68F7227FEB0AD808&index=10
Application – Price CeilingPrice of
IceCreamCones
Quantity of Ice-Cream Cones 0
Demand
Supply
Price ceiling
Equilibriumpoint
Quantitydemanded
Quantitysupplied
Shortageof 50 cones
Scenario: the government places a price ceiling on ice cream cones as a result of complaints and lobbying from the Ice-Cream Eaters of America. The price ceiling is at $2.00 a cone. Graph the following schedule based on the price points and qs/qd.
Price of Ice Cream Cones
Quantity Demanded
Quantity Supplied
$3 100 100
2 125 75
2
$3
75 100 125
The government imposes a price ceiling of $2. Because the price ceiling is below the equilibrium price of $3, the market price equals $2. At this price, 125 cones are demanded and only 75 are supplied, so there is a shortage of 50 cones.
Application – Price FloorPrice of
IceCreamCones
Quantity of Ice-Cream Cones 0
Demand
Supply
Price floor
Equilibriumpoint
Quantitydemanded
Quantitysupplied
Surplus of 40 ce Cream
ConesScenario: the government places a price floor on ice cream cones as a result of complaints and lobbying from the National Organization of Ice-Cream Makers. The price floor is at $4.00 a cone. Graph the following schedule based on the price points and qs/qd.
Price of Ice Cream Cones
Quantity Demanded
Quantity Supplied
$4 80 120
3 100 100
$4
3
80 100 120
The government imposes a price floor of $4, which is above the equilibrium price of $3. Therefore, the market price equals $4. Because 120 cones are supplied at this price and only 80 are demanded, there is a surplus of 40 cones.
18
A store sells cheddar cheese by the pound. The schedule reflects the quantity demanded and the quantity supplied for the different prices the cheese could be sold.
Answer the following question: a. What is the market price? _________ b. What is the quantity demanded at the market price? _______c. What is the quantity supplied at the market price? _________ On your graph, draw a line across your graph at the price of $4.00. d. If the government were to set a price no higher than $4.00,
this would be called a __________________________e. Use your answer in (a) to label the line on your graph at the
price of $4.00.f. At a price of $4.00, the quantity demanded would be __________g. At a price of $4.00, the quantity supplied would be __________h. Is there a surplus or shortage of cheese? _____________On your graph, draw a line across your graph at the price of $5.50.i. If the government were to set a price no lower than $5.50, this would
be called a _________________j. Use your answer in (a) to label the line on your graph at the price of
$5.50.k. At a price of $5.50, the quantity demanded would be _____________l. At a price of $5.50, the quantity supplied would be _____________m. Is there a surplus or shortage of cheese? _____________________
4.50280
280
price ceiling
300240
shortage
price floor
240360
surplus
50 100 150 200 250 300 350 400 450
1
2
3
4
5
$6
Teacher Pay and Price Ceilings
Non-Binding Price Ceiling
Non- Binding Price Ceiling – price ceiling is above equilibrium and thus has no effect on the equilibrium
Non-Binding Price Floor
Non- Binding Price Floor – price floor is below equilibrium and thus has no effect on the equilibrium
Activator – Chapter 5 Elasticity and its Application
1. List an item that you would buy less of if the price increased
2. List an item that you would buy more of if the price decreased
3. List an item that you would continue to buy, even if the increased
Elasticity
Elasticity – measure of the responsiveness of quantity demanded or quantity supplied to a change in price
Price elasticity of demand – measures how consumers will cut back or increase their quantity demanded for a product when prices rise or fall
Measures the extent to which changes in price causes changes in quantity demanded.
Helps determine how much a price change will influence the qd of any given product
Elastic Demand
Elastic – quantity demanded changes drastically when a price rises or falls
A consumer is very responsive to price changes
Inelastic Demand
Inelastic - changes in price cause a relatively small change in quantity demanded
Consumers continue to purchase regardless of a price change
Slope of the Curve
0
P
QD
D
P2
P1
0
P
QD
D
P2
P1
Elastic Demand Curve
0
P
QD
D
80,000
40,000
10,000
10 100
Inelastic Demand Curve
0
P
QD
D
$3.00
1.50
.50
2 3
Determinants of Demand Elasticity1. Availability of Close Substitutes
• Pepsi/Coke, Butter/Margarine
2. Necessities versus Luxuries
• Medicine versus a luxury automobile
3. Definition of the Market
• Food – broad category (inelastic)
• Ice Cream – narrower (more elastic)
• Vanilla Ice Cream – very narrow category (very elastic)
4. Time Horizon
• Longer time horizon – more elastic
• Gas in the short run is inelastic, but over time elastic
Elastic Supply• Elastic – suppliers can easily increase or decrease their quantity
supplied in the short run
Inelastic Supply• Inelastic – suppliers have difficulty changing the quantity
supplied
Elastic Supply Curve
0
P
QS
S10
1
5 20
Inelastic Supply Curve
0
P
QD
D
$3.00
1.50
.50
2 3
Elasticity of SupplyPrice per painting
Quantity of paintings
S
1
P3
P2
P1
D1D2
D3
Elasticity of SupplyPrice per ticket
Quantity of seats
S
D1D2
D3
$1000
$500
$100
80,000
Computing the Price Elasticity of Demand
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price Value is less than 1, it is considered inelastic.
Inelastic – Demand is < 1 Value is greater than one, demand is elastic.
Elastic – Demand is > than 1 Value is equal to one, demand is unitary elastic.
Unitary Elastic – Demand is = 1 Value is equal to 0, demand is perfectly inelastic.
Perfectly Inelastic – Demand is = 0 Value is equal to infinity, demand is perfectly elastic
Perfectly Elastic – Demand is = infinity
Computing the Price Elasticity of Demand
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price Percentage Change in QD – 25% Percentage Change in Price – 15%
Percentage Change in QD – 10% Percentage Change in Price – 15%
Percentage Change in QD – 15% Percentage Change in Price – 15%
.25_ .15
= 1.67 Elastic
.10_ .15
= .67 Inelastic
.15_ .15
= 1 Unitary Elastic
Application – Elasticity of Ice Cream ConesThe Midpoint Method
Price
3.00
5.00
6.00
$7.00
2.00
1.00
0 5 10 15 20 25 30 35 Quantity Demanded of Ice-Cream Cones per week
4.00
$1___ $3.5
.67_ .29
= .29
= 2.3
_10___ 15
= .67
Elastic
Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
% change in qd% change in price
Horizontal is more elastic
“E”
The Midpoint MethodPrice Elasticity =
Price
8.00
$10.00
0 8 10
Quantity
10 – 8_ 9
22% 22%
= .22
= 1
$10 – 8_ $9
= .22
Unitary Elastic
A
B
B A
10 – 8__ 9
.22 .22
= .22
= 1
$10 – 8 9
Unitary Elastic
A B = .22
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
Application – Elasticity of Table Salt
Price
3.00
5.00
6.00
$7.00
2.00
1.00
0 5 10 15 20 25 30 35 Quantity Demanded of Table Salt
4.00
$4___ $4
.40 1
= 1
= .4
5 ___ 12.5
= .40
Inelastic
Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
% change in qd% change in price
Vertical is more elastic
“I”
• Use the formula to show how you determine elasticity of demand for the graph.• Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________• P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________• - Elasticity QD______ /______P = ________• Did the price change cause an elastic or inelastic response in the QD for
ice cream cones? ________________________________________________
.67 . 50
20
Elasticity Application 1
Elastic
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
510 10 20 10 15 .67
3 2 5 3 4 .50
1.34
.46 1 .46
Elasticity Application 2
• Use the formula to show how you determine elasticity of demand for the graph.• Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________• P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________• - Elasticity QD______ /______P = ________• Did the price change cause an elastic or inelastic response in the QD for
insulin? ________________________________________________
8 5 3 8 5 6.5 .46
Inelastic
6 2 4 6 2 4 1
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
Total Revenue
• Total Revenue – the total amount paid by buyers and received by sellers of a good; total amount of money generated by the firm through sales• Price of the goods x quantity demanded = Total Revenue
Price of a slice of pizza Quantity DemandedPer day
Total Revenue
$.50 300 150
$1.00 250 250
$1.50 200 300
$2.00 135 270
$2.50 100 250
$3.00 50 150
Elasticity Application 3Scenario: The Apple store in St. John’s Mall made the decision to drop the price of their Ipod Nano from $150 to $125. As a result, the sale of Nano’s increased from 200 a week to 250. - Create a Demand Schedule and Curve based on the above information.
Price of Nanos
QD per week
Price Per Ipod Nano
QD 0
2. Did the price change cause an elastic or inelastic response in the QD for Nano’s? ___________________3. If the firm drops their price by _________%, they will see an increase in sales of __________% 4. To determine if this is a good decision for the firm, calculate the total revenue of each price:- Multiply the first price of the Nano by the first QD – $______ x _______ = ___________________- Multiply the second price of the Nano by the second QD – $ ______ x _______ = __________________5. Which price point generates the most total revenue? ______________________
150
125
200
250
Elastic
18 22
150 200 $30,000 125 250 $31250
125
150
125
200 250 • Use the formula to show how you determine elasticity of demand for the graph.• Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________• P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________• - Elasticity QD______ P______P = ________• Did the price change cause an elastic or inelastic response in the QD for
Nanos? ________________________________________________
250 200 50 250 200 225 .22
.22 .18 1.22
Elastic
150 125 25 150 125 137.5 .18
• What is the price elasticity of demand when the price changes from $1 to $2? _________*Use the midpoint method formula to determine the answer to #1*
Q2 – Q1__ ________ (Q2 + Q1)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/2
201701
1.5
.12
.67
.18
Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)
• What is the price elasticity of demand when the price changes from $5 to $6? _________*Use the midpoint method formula to determine the answer to #1*
Q2 – Q1__ ________ (Q2 + Q1)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/2
20 901
5.5
.22
.18
1.22
Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)
The Flaw in Point Elasticity of DemandPercentage Change from the Original
Elasticity = Percentage change in Quantity Demanded/Percentage change in Price
Price
8.00
$10.00
0 8 10
Quantity
10 – 8 X 100 10
.20_ -.25
= .20
= -.8
$8 – 10 X100 $8
= -.25
Inelastic
A
B
B A
8 – 10 X 100 8
-.25_ .20
= -.25
= -1.25
$10 – 8 X100 $10
Elastic
A B = .20
% Q % P
Due Wednesday
1. Determinants of Supply Video2. Supply and Demand Practice3. Supply and Demand Application4. Supply and Demand Review5. Tennis Ball Simulation6. SQ3R Prices & Supply and
Demand7. Crossword Puzzle8. Study Guide9. Terms10. Essential Questions11. Standards Sheet & Test
Corrections12. Notes13. Daily Tens
Due Wednesday1. Demand Curve Assignment 2. Chapter 4 Application
Worksheet 3. Supply and Demand Model
Practice 4. Video supply and demand
chart5. Supply and demand review6. Supply and Demand
Application7. Elasticity of demand8. Daily tens9. Notes (4-6)10. Terms
