Bell ringer What are some examples of Demand and Supply shifters? Income - If people have more money, the demand for products can increase. Changes in competition - If the competitors of a product increase their price, then the demand for your product may increase. Supply: Number of sellers - If the number of sellers increases, then the supply will increase. Resources - If resources needed to build a product are moved to another product, then supply will decrease. Costs of manufacturing - If the costs for making a product increase, the supply will decrease

Agenda What is a substitute good? What is a complementary good? What effect does a change in the price of one good have on the demand for a complementary or substitute good? What is Elasticity? Elastic vs. inelastic What is a price ceiling? What is a price floor?

Supply and Demand

What could cause an effect on demand and/or supply Changes in Price Changes in Income Changes in Consumer Tastes or Preferences Changes in Govt. Policies (e.g., tax increases or tax cuts) Changes in the cost of inputs (costs of labor, e.g.) Changes in Technology Changes in the number of consumers or suppliers Future expectations and several other things

What is a substitute good? A substitute good is a product that satisfies the same basic want as another product. Tea and coffee, margarine and butter, ground beef and steak, Pepsi and Coke are some examples of substitute goods.

How does the substitution effect work?

What is a complementary good? A complementary good is a product that is used or consumed jointly with another product; tennis rackets and tennis balls are one example.

There are many other examples of complementary goods. Hot dogs and hot dog buns, e.g. If you buy one good, you are quite likely to buy the other. Bread and butter, or tea and sugar, or paint and paintbrushes, are just a few of those that are closely connected. Can you think of any others?

What effect does a change in the price of one good have on the demand for a complementary or substitute good?

What is Elasticity? Elasticity is how responsive consumers are to changes in price. How much does quantity demanded changes when price changes. Elastic: Responsive to price Inelastic: not that responsive to price.

Elastic vs. inelastic Elastic inelastic Can have a lot of substitutes. i.e. Apples Not a lot of substitutes i.e. Gas

Elasticity of supply Elasticity of supply is a measure of the sensitivity of producers to a change in price. Just as with demand, supply could be affected anywhere from a little to a lot by changes in the price of an object. High elasticity indicates the supply is sensitive to changes in prices Low elasticity indicates little sensitivity to price changes No elasticity means no relationship with price.

What is a price ceiling? A maximum price set by the gov’t to prevent prices from going too high. Can lead to a shortage

What is a price floor? A minimum price set by the gov’t to prevent prices from going too low. Can lead to a surplus

Why do economist dislike price ceilings and price floors? They interfere with the market and creates inefficiencies