Transcript Supply and Demand for Boomerangs

http://www.learner.org/vod/vod_window.html?pid=2455
Market Equilibrium…
• When the supply and demand curves
intersect, the market is in equilibrium. This is
where the quantity demanded and quantity
supplied are equal. The corresponding price is
the equilibrium price or market-clearing price,
the quantity is the equilibrium quantity.
Surplus…
• If the market price is above the equilibrium price,
quantity supplied is greater than quantity
demanded, creating a surplus. Market price will
fall.
• Example: if you are the producer, you have a lot
of excess inventory that cannot sell. Will you put
them on sale? It is most likely yes. Once you
lower the price of your product, your product’s
quantity demanded will rise until equilibrium is
reached. Therefore, surplus drives price down.
Shortage…
• If the market price is below the equilibrium price,
quantity supplied is less than quantity demanded,
creating a shortage. The market is not clear. It is in
shortage. Market price will rise because of this
shortage.
• Example: if you are the producer, your product is
always out of stock. Will you raise the price to make
more profit? Most for-profit firms will say yes. Once
you raise the price of your product, your product’s
quantity demanded will drop until equilibrium is
reached. Therefore, shortage drives price up.
Government involved…
• Government regulations will create surpluses
and shortages in the market. When a price
ceiling is set, there will be a shortage. When
there is a price floor, there will be a surplus.
Price Floor
• Price Floor: is legally imposed minimum price on
the market. Transactions below this price is
prohibited.
• Policy makers set floor price above the market
equilibrium price which they believed is too low.
• Price floors are most often placed on markets for
goods that are an important source of income for
the sellers, such as labor market. Price floor
generate surpluses on the market. Example:
minimum wage.
Price Ceiling
• Price Ceiling: is legally imposed maximum price
on the market. Transactions above this price is
prohibited.
• Policy makers set ceiling price below the market
equilibrium price which they believed is too high.
• Intention of price ceiling is keeping stuff
affordable for poor people. Price ceiling
generates shortages on the market. Example:
Rent control.
Elasticity
Measures “responsiveness” to
change in price
(Measures a Movement; Price Effect)
Price Elasticity of Demand
• Sensitivity of quantity demanded to price
changes
• Elastic: Small P-change, large Q-demanded
change
• Inelastic: Large P-change, small Q-demanded
change
The Elasticity of a good’s demand
tends to increase with:
• Number of closes substitutes.
If there are 10 brands of bicycles available and
the prices for one of them increase, the
quantity of that brand demanded is likely to
fall a lot.
Elasticity (Cont.)
• The proportion of income spent on the good.
Consider gum and cruise price-change scenarios.
The quantity of cruises purchased will
probably be more affected by a 50% price
increase than the quantity of bubble gum
because an extra 2 cents is not a big deal but
an extra $500 is more likely to be prohibitive.
Elasticity (Cont.)
• Time
• When time is short, it is more difficult to
change purchasing patterns in response to
changes. The more time consumers have to
adapt, the more they are able to find
substitutes or learn to do without goods
whose prices have increased.
Elasticity (Cont.)
• The lack of importance of a good
• The less essential a good is, the more likely
consumers are to forego the good when it
becomes more expensive.
Luxuries v. Necessities
• Goods with an elastic demand are
categorized as luxuries.
• Goods with an inelastic demand are
categorized as necessities.
Why should a business care about the
elasticity of demand?
• One reason is that the elasticity determines
what happens to revenue when price changes.
– Revenue = Price x Quantity
– When facing a inelastic demand, to bring in more revenue
while selling fewer units, raise the price of the good.
Supply and Demand Practice
Answers
Supply and Demand for Boomerangs
$12
Surplus
$10
Price per Boomerang
$8
$6
Demand
Supply
$4
$2
$0
0
2
4
6
Quantity of Boomerangs
8
10
12
Supply and Demand for Boomerangs
$12
$10
Price per Boomerang
$8
$6
Demand
Supply
$4
$2
Shortage
$0
0
2
4
6
Quantity of Boomerangs
8
10
12
Supply and Demand for Boomerangs
$12
Market Equilibrium
$10
Price per Boomerang
$8
$6
Demand
Supply
$4
6
$2
$0
0
2
4
6
Quantity of Boomerangs
8
10
12
Supply and Demand for Boomerangs
$12
$10
Price per Boomerang
$8
Original Demand
$6
Supply
New Demand
$4
$2
$0
0
2
4
6
8
Quantity of Boomerangs
10
12
14
16
1. The income of the Chapel Hill townies declines
Price
after an early loss during March Madness.
S
P1
P2
D
D1
Q2
Q1
Quantity
Price
2. Chapel Hill is named one of the most
beautiful towns in North Carolina and tourism
doubles
S
P2
P1
D1
D
Q1
Q2
Quantity
Price
3. The price of blue ties decreases. (Blue ties are
a substitute good for purple ties)
S
P1
P2
D1
Q2
Q1
D
Quantity
Price
4. The Federal government has been warning the
public about the possibility of a recession and job loss
in the RDU area. (Think expectations!)
S
P1
P2
D1
Q2
Q1
D
Quantity
Price
5. The price of purple striped shirts decreases (Purple
striped shirts are a complement to purple ties)
S
P2
P1
D1
D
Q1
Q2
Quantity
6. The price of silk increases (ties are made with
silk).
Price
S1
S
P2
P1
D
Q2 Q1
Quantity
Price
7. The government adds a subsidy to tie
production.
S
S1
P1
P2
D
Q1
Q2
Quantity
Price
8. After the release of Alan Greenspan’s first jazz flute
album, purple tie producers are expecting a huge
increase in demand and thus an increase in the price.
S
S1
P1
P2
D
Q1
Q2
Quantity
9. Congress enacts new tax on the production of
purple ties.
Price
S1
S
P2
P1
D
Q2
Q1
Quantity
Price
10. As the popularity of purple ties sweeps the
greater Orange County area, new producers enter the
purple tie market.
S
S1
P1
P2
D
Q1
Q2
Quantity
Price
11. Purple ties are named by GQ magazine as a “must
have” for all young professionals. At the same time, a new
textile machine decreases the cost of producing purple
ties.
S
S1
P1
D1
D
Q1
Q2
Quantity
12. The price of pink ties (a related good that most purple tie producers also
produce) rises as spring approaches. Tie consumers in Chapel Hill begin to
expect purple ties to be put on sale since spring is coming, so they put off
purchasing.
Price
S1
S
P1
D1
Q2
Q1
D
Quantity