economics In the previous unit we took a look at different business organization types and costs that all business must deal with In our next unit we will look at how supply and demand determine what products businesses offer to the market

Economics - notes Quantity The amount of a commodity (good, service, or resource) that is produced, consumed, bought, sold, or exchanged. The quantity of the good exchanged is measured on the horizontal axis and the price of the good is measured on the vertical axis

Economics - notes Demand Quantity Demanded The desire to own something and the ability to pay for it Quantity Demanded The specific quantity of a good that buyers are willing and able to buy at a specific demand price Should the price change, then buyers are likely to demand a different quantity

Economics - notes Law of Demand The larger the demand for a good, the higher the price will be If the price of a good increases, demand will decrease If the price of a good decreases, demand will increase

Economics - notes Demand Price The maximum price that buyers would be willing and able to pay for a given quantity of a good Demand Schedule A table that lists the quantity of a good a person will buy at each different price Demand Curve A graphical representation of a demand schedule, which shows the relationship between the demand price and quantity demanded

Quantity demanded per month Demand Schedule Price of a sweater Quantity demanded per month $5 90 $10 80 $15 70 $20 60 $25 50 $30 40 $35 30 $40 20 $45 10 $50

Demand Curve

Economics - notes Change in the Demand Curve Ceteris Paribus A demand curve is only accurate only as long as there are no changes other than price that could affect the consumer’s decision In other words, a demand curve is accurate only as long as the ceteris paribus assumption is true Ceteris Paribus A Latin phrase that means “all other things held constant”

Economics - notes Change in the Demand Curve Continued… When price changes, we move along the curve to show the change in demand as price changes When other factors change, the demand curve shifts to the right or left depending on the change A shift to the right shows an increase in demand A shift to the left shows a decrease in demand

Economics - notes For Example If the demand for Oodles of Noodles changed as a result of a change in price, the demand curve would look something like this:

Economics - notes

Economics - notes For Example If the demand for Oodles of Noodles decreased as a result of something other than price, the demand curve would shift and look something like this:

Economics - notes

Economics - notes What factors can cause a shift in the Demand Curve? A shift in the Demand Curve can be influenced by the Substitution Effect, the change in price of Complimentary Goods, and the Income Effect

Economics - notes Substitution Effect When the price of a good rises, but the price of a substitute good remains the same, consumers react by consuming less of that good, and more of other similar goods For Example When the cost of gasoline rises, the amount of cars purchased and used in this country decreases At the same time, the amount of travel by bus and train increases

Economics - notes Complement Goods Two goods that are bought and used together The change in demand for a compliment good can have an impact on one another For Example If the demand for skis rise, the demand for ski boots will rise as well At the same time, if the price of skis rise, the demand for ski boots will fall

Economics - notes Income Effect The change in consumption resulting from a change in income For Example If a consumer loses his or her job or takes a pay cut, they will consume less Normal Goods, and more Inferior Goods, which can lead to a change in demand for each type of good

Economics - notes Normal Good A good that consumers demand more of when their income increases, and less of when their income decreases For Example Air Travel Inferior Good A good that consumers demand less of when their income increases, and more of when their income decreases Public Transportation

economics Pass out the “1 Shift in the Demand Curve” handout

economics Pass out the “2 Elasticity of Demand” Handout

Economics - notes Answering the Elasticity of Demand Handout The goods that would change the least in terms of the amount demanded would be considered more Inelastic The goods that would change the most in terms of the amount demanded would be considered more Elastic

Economics - notes Inelastic Describes demand for a product that changes little even when the price of that product changes These goods or services are hard to replace For example: Gas, Milk, Favorite Band, Life Saving Medication

Economics - notes Elastic Describes demand for a product that changes greatly when the price of that product changes These goods or services are easier to replace For Example: Movie Tickets, Pizza, Vacation Destinations

Economics - notes Calculating Elasticity of Demand % Change in Quantity Demanded = Elasticity % Change in Price

Economics - notes Calculating Percentage Change Original Number – New Number X 100 = Percentage Change Original Number ****Ignore all negative numbers

Elasticity of demand For Example First, calculate the percentage change for price and quantity demanded Then, calculate the Elasticity of this product Price of Pizza Quantity Demanded $.50 100 Slices $1.00 50 Slices

economics Have the class try the previous problem

Economics - notes Percentage Change in Price Answer $.50 - $1.00 X 100 = 100% Change in Price $.50 Percentage Change in Quantity Demanded 100 – 50 X 100 = 50% Change in Quantity Demanded 100

Elasticity of Demand % Change in Quantity Demanded = Elasticity % Change in Price 50 % = .5 is the Elasticity of Demand 100 %

Elasticity of Demand Measuring Elasticity Elasticity Less Than 1 = Inelastic Elasticity Greater Than 1 = Elastic Elasticity Equal to 1 = Unitary Elastic

Economics - notes What Elasticity of Demand Tells Us When a good at a particular price has Elastic Demand, raising the price of each unit sold will decrease the quantity sold by a larger percentage than the price increase This will reduce a firm’s total revenue and would not be advisable When a good or service at a particular price has Inelastic Demand, raising the price of each unit sold will decrease the quantity sold by a smaller percentage than the price increase This will increase a firm’s total revenue and would be advisable

economics Pass out “4 Elasticity of Demand Problems”

Demand Curve Resources http://classnotes.aaec.vt.edu/aaec1005/course materials/DemandExamples/dshiftframes.htm http://www.econoclass.com/supplyanddemanddr ill.html http://www.sparknotes.com/economics/micro/s upplydemand/demand/problems_1.html#explana tion4 http://www.cals.ncsu.edu/course/are012/readin gs/elasprob.html

Supply and Demand Curve Questions Elasticity Problems http://classnotes.aaec.vt.edu/aaec1005/course materials/DemandExamples/elasframes.htm Supply and Demand Curve Questions http://www.econoclass.com/supplyanddemanddr ill.html

Economics - notes Supply Quantity Supplied The willingness and ability to sell a range of quantities of a good at a range of prices Quantity Supplied The specific amount of a good that sellers are willing and able to sell at a given price Should the price change, then sellers are likely to supply a different quantity

Economics - notes Law of Supply The larger the available supply, the lower the price If the price of a good increases, more will be supplied If the price of a good decreases, less will be supplied

Economics - notes Supply Price The minimum price that sellers are willing and able to accept for a given quantity of a good Supply Schedule A table that lists the quantity of a good a person will supply at each different price Supply Curve A graphical representation of a supply schedule, which shows the relationship between the supply price and quantity supplied

Quantity supplied per month supply Schedule Price of a sweater Quantity supplied per month $5 $10 100 $15 200 $20 300 $25 400 $30 500 $35 600 $40 700 $45 800 $50 900

Supply curve

Economics - notes Equilibrium Quantity Equilibrium Price When the quantity demanded and quantity supplied are equal In equilibrium, market shortages or surpluses have been eliminated Equilibrium Price The price at which the supply of an item equals the quantity demanded

Supply meets demand

Economics - notes A Market Without Balance Shortage If the quantity demanded is not equal to the quantity supplied, then a market is faced with either a shortage or a surplus Shortage A shortage arises if the quantity demanded is greater that the quantity supplied, at a given price In this case, buyers are not able to buy as much of the good as they would like The price is likely to rise to restore balance The higher price causes a decrease in quantity demanded and an increase in quantity supplied, both of which act to eliminate the shortage

Economics - notes Surplus A surplus arises if the quantity demanded is less that the quantity supplied, at a given price In this case, sellers are not able to sell as much of the good as they would like The price is likely to fall to restore balance The lower price causes an increase in quantity demanded and a decrease in quantity supplied, both of which act to eliminate the surplus

Economics - notes Supply Curve A supply curve, like a demand curve, is only accurate as long as there are no changes other than price that could affect the consumer’s decision In other words, a supply curve is accurate only as long as the ceteris paribus assumption is true

Economics - notes Disequilibrium This occurs anytime there is shortage or surplus A surplus can occur if the price for a particular good or service is too high

Economics - notes Disequilibrium Continued… A shortage can occur if the price for a particular good or service is too low

Elastic demand curve

Reading the demand curve Elastic Demand Curve The demand curve is a negative slope, and if there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal This flatter curve means that the good or service in question is elastic Demand for elastic goods or services changes greatly with change in price

Reading the demand curve Inelastic Demand Curve Inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price

Inelastic demand curve

Reading the supply curve Elastic Supply Curve The supply curve is a positive slope, and works similarly to elasticity of demand If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic

Reading the supply curve Inelastic Supply Curve On the other hand, if a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper it would be considered inelastic

Elasticity of supply Calculating Elasticity of Supply Elasticity of Supply can be found the same way we find Elasticity of Demand

Elasticity of supply Calculating Elasticity of Supply % Change in Quantity Demanded = Elasticity % Change in Price

Elasticity of supply Calculating Percentage Change Original Number – New Number X 100 = Percentage Change Original Number ****Ignore all negative numbers

Economics - notes Elasticity of Supply and Time Generally speaking, in the short run it is difficult for most firms to change output levels, making the supply of some goods and services inelastic in the short run For Example If an orange tree takes three years before an orange is produced, it is very difficult to increase the output of oranges in the short term

Economics - notes Elasticity of Supply and Time Generally speaking, in the long run it is easier for firms to change output levels, making most goods and services more elastic in terms of supply in the long run For Example If an orange farmer plants additional orange trees, the supply of oranges in the long run will increase

economics Pass out “5 Shift in Supply and Demand Curve” Pass out “6 Elasticity of Supply Problems”

Economics - notes Is the supply of these goods and services elastic or inelastic (Short Term, Long Term)? Answer the following and provide a brief explanation for each Hotel Rooms in Ocean City, MD Tickets to a Penn State Football Game A Haircut at Malcolm’s Nina’s Pizza

Economics - notes Hotel Rooms in Ocean City, MD Short Term – Inelastic The building of more hotels would take time Long Term – Elastic Over time it would be possible to build more hotels Tickets to a Penn State football game Adding seats to a stadium would take time Over time it would be possible to add seats

Economics - notes A Haircut at Malcolm’s Nina’s Pizza Short Term – Elastic You can increase supply by hiring more workers or by adding shifts for your current employees Long Term – Elastic You can increase supply by expanding the size of the salon Nina’s Pizza You can increase supply by expanding the size of the restaurant or by purchasing additional equipment (more ovens)

economics Jeopardy Test