AGENDA Peer grade elasticity worksheet Intro to supply

Determinants of elasticity: Can the purchase be delayed? If purchase cannot be delayed, demand is inelastic If purchase can be delayed, demand is elastic Necessities – insulin.

Determinants of elasticity: Are adequate substitutes available? If yes, consumers can switch back and forth to take advantage of the best price The fewer the substitutes, the more inelastic demand The more substitutes a product may have, the more elastic demand Necessities – insulin.

Determinants of elasticity: Does the purchase use a large portion of income? If yes, demand tends to be elastic If no, demand tends to be inelastic Medical services tend to be inelastic, even though they take a large portion of income…WHY? Necessities – insulin.

HOMEWORK Insulin Gas at a particular station Corn Gas in general Inelastic Corn Gas in general Elastic Tobacco Funeral services Depends – are you addicted? Can be inelastic if so!

HOMEWORK Airline tickets to vacation resorts Clean water Butter Depends – are you in a developing country? If so, then inelastic Elastic Butter elastic Expensive cars Medical care Inelastic Milk

You’re starting a new business You’re starting a new business. How might you set your prices, knowing the idea behind demand elasticity? If you’re a new business – you really need to know this becaue if you get the price wrong, you’ll f it up. Principles or rules of thumb – steep = inelastic, shallow = elastic. If it’s 1/1 or 45 degree angle, it’s unit elastic. Example – concert promoter at a venue. The room holds 800, if you sell tickets at 20, you’ll sell 600, if you sell it at 15, you’ll sell 800. And – they make the same amount of money – that’s a unit elastic situation. Price still matters – you want to sell 800 seats at 15 each – there are complementary products – if there are more people, youll sell more shirts and cds and beer etc.

Revenue and Elasticity The elasticity of demand determines how a change in prices will affect a firm’s total revenue (income) Total revenue is the total amount of money they collect from selling it’s good or service Firms must be aware of elasticity for their product If a good has an elastic demand, raising prices may actually decrease their total revenue…WHY? Necessities – insulin.

Partner quiz! It’s fill in the blank. You can do it.

SUPPLY Supply curves are mirror images to demand curves Change in quantity supplied Change in supply Supply = amount of a product offered for sale at all possible prices

SUPPLY What’s the Law of Demand? Predict: what’s the Law of Supply? When price increases, quantity demanded decreases Predict: what’s the Law of Supply? Suppliers will offer more for sale at high prices and less at lower prices As price increases, the quantity supplied increases Suppliers are incentivized by profit, so as the price goes up, so does their potential product – so they’ll sell more

SUPPLY Example: teaching extra classes What might my attitude be like if I taught the class for the dismal amount he offered? How would that change if I was making $20,000 to teach that class? If ryan comes up to me and asks me to teach six classes instead of five, what are my possible options – yes and no. why might I say yes? Why might I say no? But, if he says that I’ll get paid $20,000 to teach an extra class. H

SUPPLY Example: freshmen failures Ryan sees the freshman class struggling with grades, and comes up with a solution: Ask the smartest seniors, who scored a 26.1 on the ACT, to help the freshmen Work around your schedule – before/after school, weekends, off periods, totally flexible How many of y’all would do it? Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY Example: freshmen failures Ryan scrapes together some money, and is willing to give you $5/hr to tutor Now how many? Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY Example: freshmen failures Ryan scrapes together some money, and is willing to give you $10/hr to tutor Now how many? Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY Example: freshmen failures Ryan scrapes together some money, and is willing to give you $15/hr to tutor Now how many? Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY Example: freshmen failures Ryan scrapes together some money, and is willing to give you $20/hr to tutor Now how many? Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY Example: freshmen failures Ryan scrapes together some money, and is willing to give you $50/hr to tutor Now how many? Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY The higher the price of the good or service, the more changes you’re willing to make in your life When the price was $0, few wanted to do it. When the price raised to $50, everyone wanted to do it. Silva is under pressure to improve the standarzied test scores of incoming freshmen… but…. The seniors scored the highest average score on the SAT. Silva asks seniors to tutor freshman – and will work around their schedule –before/after/weekends/off etc, total flexible – if they’d volunteer to do it. So: totally honest – based on your circumstances (commitments or not) – if he gave you this offer, how many hours a week do you think you’d offer to tutor freshmen? Write it down. Then, poll the class. Some will say zero, some will say 2ish – why? I like the school. I like Mr. Silva. Etc. CHANGE THE SCENARIO. But, this time,Silva says the PTA has scraped together some money, and for every hour you’d volunteer, you’d get $5. Then, write down the number and poll the kids. Some things won’t change at all, but some people will more inclined to do so. THEN RAISE IT. $10. $15. $20. $50. Keep polling the students. The numbers are bigge r- at $50 an hour, they’ll do it more – will they ditch classes to tutor freshman? Haha! What they just indicated is the law of supply – the higher the price of the good ro service, the more changes you’re willing to make in your life to offer that good or service. The opportunity cost is too great when the price is $5. As price goes up, quantity supplied goes up.

SUPPLY For the supplier, profit = revenue – cost X is coming in, Y is going out – profit the difference between the two Your incentive as a seller is to maximize profits How do you do this? Two ways: Increasing revenue Reducing production costs

Change in Supply Supply Schedule Price of Cereal Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 21

companies start making GRAPHING SUPPLY Supply Schedule What if new companies start making cereal? Price of Cereal Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 22

Change in Supply Supply Schedule Price of Cereal Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 23

Change in Supply Supply Schedule Price of Cereal Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 24

Change in Supply Supply Schedule Price of Cereal Supply $5 70 $4 60 $3 2 1 Price Quantity Supplied $5 70 $4 60 $3 50 $2 40 $1 10 30 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 25

Prices didn’t change but there is MORE cereal produced Change in Supply Supply Schedule Price of Cereal Supply S1 $5 4 3 2 1 Price Quantity Supplied $5 70 $4 60 $3 50 $2 40 $1 10 30 Increase in Supply Prices didn’t change but there is MORE cereal produced Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 26

destroys corn and wheat Change in Supply Supply Schedule What if a drought destroys corn and wheat crops? Price of Cereal Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 27

Change in Supply Supply Schedule Price of Cereal Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 28

Change in Supply Supply Schedule Price of Cereal Supply $5 50 $4 40 $3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 29

Change in Supply Supply Schedule Price of Cereal Supply $5 30 $4 20 $3 1 Price Quantity Supplied $5 30 $4 20 $3 10 $2 1 $1 10 0 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 30

Prices didn’t change but there is LESS cereal produced Change in Supply Supply Schedule Price of Cereal Supply S1 $5 4 3 2 1 Price Quantity Supplied $5 30 $4 20 $3 10 $2 1 $1 10 0 Decrease in Supply Prices didn’t change but there is LESS cereal produced Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 31

What if cereal companies find a quicker way to make Change in Supply Supply Schedule What if cereal companies find a quicker way to make cereal? Price of Cereal Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 32

JUST LIKE WITH DEMAND… A change in price alone can never change supply Changes in PRICE don’t shift the curve. It only causes movement along the curve.

SHIFTING THE SUPPLY CURVE Productivity Expectations for profit Technology Taxes and Subsidies Input costs Number of sellers Government regulations

Productivity Associated with labor – the amount of work you get out of a laborer (or machine) Workers cost X and produce Y How can you increase production without having to hire more workers?

Expectations for Profit If a company believes that its product price will raise in the future, they may make plans now to produce more later on – and vice versa Example?

Technology New technology increases productivity Buying new capital that performs the same task at a higher rate Can you have technology that will shift the supply curve to the left? Yeah – what if employees don’t know how to use the new technology? OR maybe your new tech breaks down all the time?

Taxes and subsidies Taxes, like labor, is a cost of production If taxes increase, cost of production increases, and the supply curve will shift to the left If taxes decrease, cost of production will decrease, supply will shift to the right

Input costs Aka, costs of resources! The supply curve is where it is because of costs Say you open up a pizza shop. What factors of production go in to you making your pizza? Flour, yeast, tomatoes, mozerella, ovens, delivery drives - what happens if the cost of one of these increases? You’re less willing to supply that same pizza for the same price

Number of sellers If more people who sell the same product enter the market, the supply curve will shift right If those companies fail, and leave the market, the supply curve will shift left How does the Internet affect the number of sellers?

Governmental regulations Increased government regulations restrict supply, causing the supply curve to shift left Decreased government regulations allow producers to lower the cost of production, which shifts the curve to the right Example? Requiring cars to have something?

Supply Practice: Hamburgers Which determinant (SHIFTER)? Increase or decrease? Which direction will curve shift? Supply Practice: Hamburgers Mad cow disease kills 20% of cows Price of hamburgers increase 30% Government taxes burger producers Restaurants can produce burgers and/or tacos. A demand increase causes the price for tacos to increase 500% New bun baking technology cuts production time in half Minimum wage increases to $20 Decrease in availability of resources, decrease. Price doesn’t shift curve, no shift. Government action, decrease. Opportunity cost of alternative production, decrease. Technology, increase. Price of resources, decrease.