Focus Question, then turn them in TODAY! Define the Law of Demand Define the Law of Supply Draw the difference between a change in demand and a change in quantity demanded? What happens if price is above equilibrium? What happens if price is below equilibrium? Explain the results of a tax

Consumers will buy more when prices go down and less when prices go up THE LAW OF DEMAND SAYS... Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? DOES IT MATTER?

Elasticity shows how sensitive quantity is to a change in price. Does not always have to be a money thing. Temperature elasticity vs. ice cream (as the temperature goes up, people buy more ice cream).

1. Elasticity of Demand Elasticity of Demand- Measurement of consumers responsiveness to a change in price. What will happen if price increase? How much will it effect Quantity Demanded Who cares? Used by firms to help determine prices and sales Used by the government to decide how to tax PED- compare the percentage change in Qd/ percentage change in price If the % change in Qd > % change in P, then PED>1, ELASTIC If the % change in Qd < % change in P, then PED<1, INELASTIC If the % change in Qd = % change in P, then PED=1, UNIT ELASTIC

Inelastic Demand

Inelastic Demand INelastic = Quantity is INsensitive to a change in price. If price increases, quantity demanded will fall a little If price decreases, quantity demanded increases a little. In other words, people will continue to buy it. 20% 5% A INELASTIC demand curve is steep! (looks like an “I”) Examples: Gasoline Milk Diapers Chewing Gum Medical Care Toilet paper

General Characteristics of INelastic Goods: Inelastic Demand General Characteristics of INelastic Goods: Few Substitutes Necessities Small portion of income Required now, rather than later Elasticity coefficient less than 1 20% 5%

Elastic Demand

Elastic Demand An ELASTIC demand curve is flat! Elastic = Quantity is sensitive to a change in price. If price increases, quantity demanded will fall a lot If price decreases, quantity demanded increases a lot. In other words, the amount people buy is sensitive to price. An ELASTIC demand curve is flat! Examples: Soda Boats Beef Real Estate Pizza Gold

General Characteristics of Elastic Goods: Elastic Demand General Characteristics of Elastic Goods: Many Substitutes Luxuries Large portion of income Plenty of time to decide Elasticity coefficient greater than 1

2. Price Elasticity of Supply Elasticity of supply shows how sensitive producers are to a change in price. Elasticity of supply is based on time limitations. Producers need time to produce more. INelastic = Insensitive to a change in price (Steep curve) Most goods have INelastic supply in the short-run Elastic = Sensitive to a change in price (Flat curve) Most goods have elastic supply in the long-run Perfectly Inelastic = Q doesn’t change (Vertical line) Set quantity supplied