Transcript File

In Demand
“Supply”
Your
Knowledge!
Elasticity
Elasticity II
Equilibrium!
100
100
100
100
100
200
200
200
200
200
300
300
300
300
300
400
400
400
400
400
500
500
500
500
500
The law of demand: As price falls, the
corresponding quantity demanded tends to
increase.
Since price is an obstacle:
1. The higher the price of a product, the less it
is demanded.
2. When the price is reduced, demand
____________
Increases.
Consumer preferences lead to a
rejection of a product. This
causes a ________ in demand
and a shift to the _____.
Equilibrium price decreases.
Price decreases, left
The market for the demand of goods
isn’t decided by individuals, but the
buying habits of thousands of
consumers that decide the
_________ for most goods.
The sum of consumer demands for a
product is called the market
____________.
Demand, demand schedule
An increase in the price of ice cream
causes a __________ along the demand
curve. The quantity demanded _______
and the curve shifts ______
Movement, decreases, left
DAILY DOUBLE
Consider two instances where the price of goods fall. A
fall in the price of a good reduces the demand for its
substitute (e.g. Coke and Pepsi). A fall in the price of a
good increases the demand for its complement (Cars and
gasoline). In these instances….
1. Demand for the substitute _____ ___ and its demand curve
shifts to the _______.
2. Demand for the complement ________ and its demand
curve shifts to the ______.
1. Decreases, left
2. Increases, right
P
S
S
1
Increase in
Supply
Q
A non-price factor causing an increase in supply
makes the supply curve to shift to the right and the
equilibrium price to ________
Decline.
A change in quantity supplied
is a movement along the supply
curve due to a change in the
selling price of the good. What
shift occurs to the supply curve
in this case?
No shift occurs! Only non-price
factors cause the curve to shift.
A change in supply is a shift of
the supply curve due to a change
in any of its determinants except
price.
An increase in supply means a
shift to the _____
A decrease in supply means a
shift to the _____
Right, left
An environmental disaster causes a
________ in supply. As a result the
supply curve shifts to the _______.
Equilibrium price increases.
Decrease, left
DAILY DOUBLE
Difference between supply and quantity of
supply:
“Supply” is the entire set of price and quantity
relationships (see supply schedule) while
“quantity supplied” refers to one
relationship determined by ________.
Price
The size of the demand
coefficient will tell us how
elastic the good is. This
elasticity tells us how responsive
demand is to a change in
________.
Price
People respond to changes in price
differently depending on various factors.
They ask themselves the following
questions when considering purchasing
goods:
Are there a large number of____________
for the good or am I stuck buying it?
Is the good a luxury or a___________?
Substitutes, necessity
With inelastic demand, quantity demanded does
not respond strongly to__________________.
price changes.
The % change in Qd < % change in P
Ep < 1
With inelastic demand, the change in P is
proportionally __________ than the change in
QD.
The change in P
is proportionally
bigger than the
change in QD.
P
D
Q
DAILY DOUBLE
With elastic demand, quantity demanded responds strongly to
changes in price. The % change in Qd > % change in P and the
elasticity is greater than 1.
In this situation, the slope of the demand curve would be fairly
____________.
The change in Qd is
proportionally bigger than
the change in P. People’s
demand responds strongly to
a price change.
Price
D
Quantity
fairly flat.
The more price-inelastic the
demand for a good, the
_________ the slope of the
demand curve will be.
Steeper. A change in price
with inelastic goods does not
change demand for a good
significantly.
Goods that are luxuries tend
to have ______demand.
Example: the demand for plasma TVs (if
the price is right, you may buy one, but you
likely won’t buy one if the price is too high
for your budget)
Elastic
How you narrowly you define the market for something
makes a difference in how you classify its elasticity.
Example:
food = inelastic item
vegetables = ____________
broccoli = ____________
Hint: The more narrowly defined the market, the more elastic the
demand for that good.
Food = Inelastic item
Vegetables = more elastic item
Broccoli = most elastic item
Evaluate the graph below.
P
Ep > 1 is __________
The elasticity
coefficient is ____at
the midpoint
Ep < 1 is
____________
Q
Elastic,1, Inelastic
A firm wants to maximize its profit.
Other things being equal, it will want to
maximize its total revenue.
The firm would like to sell as much as it
could at the highest price it could get.
But, it wouldn’t want to charge a price
so high that it loses ___________and its
____________ drops.
Customers, revenue
A market economy allows the rise and
fall of prices to guide actions in the
economy.
This “invisible hand” pricing
mechanism coordinates individuals’
decisions so that ______ will always
adjust to achieve market__________.
Prices/ equilibrium
DAILY DOUBLE
When the quantity supplied exceeds the quantity
demanded (surplus), prices tend to_______.
When the quantity demanded exceeds the
quantity supplied (shortage), prices tend
to_______.
When the quantity demanded equals the quantity
supplied, prices have no _____________ and the
market is in equilibrium.
Fall, rise, no tendency to change
Law of Supply and Demand: The price
of any good adjusts to bring the
____________and the ____________for
that good into balance.
The market returns to equilibrium if
it is left to operate freely.
Quantity supplied, quantity
demanded
A shift in demand that caused by
a non-price factors makes
equilibrium prices decline. This
causes a shift of the demand
curve to the _______
Shift to the left
DAILY DOUBLE
Price
S
surplus
$2.5
0
$2.00
Eqm.
P*
D
4
7
Eqm. Q*
10
Qty. of Ice
Cream Cones
Explain the situation between demand and
supply during a surplus…
When a market is in surplus, the
QS > QD and there is an excess
of supply. Prices must drop for
the market to return to
equilibrium.