Supply and Demand Review Define the Law of Demand Define the Law of Supply What is 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? Define Consumer’s and Producer’s Surplus Identify the rule for double shifts in S&D Explain the results of an excise tax Define Dead Weight Loss Name 10 musical instruments

Elasticity shows how sensitive Quantity is to Change in Price.

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?

4 Types of Elasticity Elasticity of Demand Elasticity of Supply Cross-Price Elasticity (Substitute or Complement) Income Elasticity (Normal or Inferior)

1. Elasticity of Demand Inelastic Elastic % Δ Q % Δ P Ex. Ex. 20% 5% Price Quantity Price Quantity 20% 5% 35%

Elastic or Inelastic Explain why for each of the following. Salt New Cars Pork Chops European Vacation trip Insulin Insulin at one of four drugstores in a shopping mall.

1. Elasticity of Demand Elastic Inelastic

1. Elasticity of Demand Elastic Inelastic

1. Elasticity of Demand 1 Inelastic Elastic % Δ Q % Δ P Unit Elastic Price Quantity 20% % Δ Q % Δ P Unit Elastic 1 Inelastic Elastic

1. Elasticity of Demand Total Revenue Test Price Inelastic Elastic TR = P x Q Inelastic Elastic Price

Is the range between A and B, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 5 x 225 = $1125 Price Quantity A B Price decreased and TR increased, so… Demand is ELASTIC 10 5 % Δ Q % Δ P 100 225

Is the range between B and A, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 8 x 110 = $880 Price Quantity A B Price increased and TR increased, so… Demand is INELASTIC 10 8 % Δ Q % Δ P 100 110

Is the range between A and B, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 5 x 225 = $1125 Price decreased and TR increased, so… Demand is ELASTIC Price Quantity % Δ Q % Δ P

2. Elasticity of Supply Inelastic Elastic % Δ Q % Δ P Ex. Ex. 20% 5% Price Quantity Price Quantity 20% 5% 35%

2. Elasticity of Supply 1 Inelastic Elastic % Δ Q % Δ P Unit Elastic Price Quantity 20% % Δ Q % Δ P Unit Elastic 1 Inelastic Elastic

Elasticity Coefficient for Demand & Supply | Δ Q | % Δ Q % Δ P (Q1+Q2)/2 = | Δ P | (P1+P2)/2 Price Quantity A B 100 220 15 5 QBig-Qsmall (QBig+Qsmall)/2 PBig-Psmall (PBig+Psmall)/2

Elasticity Coefficient for Demand & Supply QBig-Qsmall (QBig+Qsmall)/2 % Δ Q % Δ P = PBig-Psmall (PBig+Psmall)/2 Price Quantity A B 100 220 15 5 220-100 120 (100+220)/2 160 = 15-5 10 (15+5)/2 10

3. Cross-Price Elasticity Complement Substitute % Δ Q % Δ P B A

3. Cross-Price Elasticity Complement Substitute % Δ Q % Δ P B A Complement Substitute

4. Income Elasticity Inferior Normal % Δ Q % Δ I

4. Income Elasticity Inferior Normal % Δ Q % Δ I Inferior Normal

Elasticity Practice

Elasticity Price 1.25 1.00 0.75 0.50 0.25 Quantity 200 250 300 350 400 The demand for video game tokens at the neighborhood arcade. Using the midpoints formula, between $.50 and $.25 the price elasticity of demand equals______? Suppose that Price = .75 currently. A decrease in price will do what to total revenue?

This demand curve is price elastic from _______ to _______. 10.50 9.50 8.50 7.50 6.50 5.50 4.50 Quantity 220 260 300 340 380 420 460 Demand for prime rib. Using the midpoints formula, this demand curve is unit elastic between _______? This demand curve is price elastic from _______ to _______. Suppose that Price = $6.00, A 3% decrease in quantity demanded would require a ____ increase in price. Suppose that Price = $6.50 currently. A decrease in price will do what to total revenue.

AP Micro Free Response Elasticity FRQ-Assume the following about laptop and desktop computers: The demand for computers is price inelastic Laptop and desktop computers have a cross price elasticity coefficient of +3.6 Computers and DVD burners have a cross price elasticity coefficient of -0.8 All computers have a income elasticity coefficient of +2.3 (a) Using correctly labeled graphs, show the impact of a change in technology that improves only the production of laptop computers on the following: i. Price of laptop computers ii. Output of laptop computers iii. Total revenue of laptop computer producers iv. Price of desktop computers v. Output of desktop computers (b) Using new correctly labeled graph, show the impact of a decrease in price of DVD burners on the following: i. Price of computers ii. Output of computers (c) Using new correctly labeled graphs, show the impact on the following when income increases by 30%: ii. Quantity of computers iii. Price of DVD burners iv. Quantity of DVD burners

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

1. Elasticity of 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 Diapers Medical Care Milk Chewing Gum Toilet paper

General Characteristics of INelastic Goods: 1. Elasticity of Demand 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%

1. Elasticity of Demand Elastic Demand 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 Beef Pizza Boats Real Estate Gold

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

Elastic or Inelastic? What about the demand for insulin for diabetics? Beef- Gasoline- Real Estate- Medical Care- Electricity- Gold- Elastic- 1.27 INelastic - .20 Elastic- 1.60 INelastic - .31 INelastic - .13 Elastic - 2.6 What if % change in quantity demanded equals % change in price? Perfectly INELASTIC (Coefficient = 0) Unit Elastic (Coefficient =1) 45 Degrees

Total Revenue Test Uses elasticity to show how changes in price will affect total revenue (TR). (TR = Price x Quantity) Elastic Demand- Price increase causes TR to decrease Price decrease causes TR to increase Inelastic Demand- Price increase causes TR to increase Price decrease causes TR to decrease Unit Elastic- Price changes and TR remains unchanged Ex: If demand for milk is INelastic, what will happen to expenditures on milk if price increases?

2. Elasticity of Supply 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

3. Cross-Price Elasticity of Demand Cross-Price elasticity shows how sensitive a product is to a change in price of another good It shows if two goods are substitutes or complements % change in quantity of product “b” % change in price of product “a” P increases 20% Q decreases 15% If coefficient is negative (shows inverse relationship) then the goods are complements If coefficient is positive (shows direct relationship) then the goods are substitutes

4. Income-Elasticity of Demand Income elasticity shows how sensitive a product is to a change in INCOME It shows if goods are normal or inferior % change in quantity % change in income Income increases 20%, and quantity decreases 15% then the good is a… INFERIOR GOOD If coefficient is negative (shows inverse relationship) then the good is inferior If coefficient is positive (shows direct relationship) then the good is normal Ex: If income falls 10% and quantity falls 20%…

Password Demand Substitute Inferior Good Elastic Total Revenue Test

Password Subsidy Supply Excise Tax Inelastic Elasticity Coefficient

Elasticity Practice 38

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(i)The price of tickets (ii)The quantity of tickets sold 1996 Micro FRQ #2 The Toledo arena holds a maximum of 40,000 people. Each year the circus performs in front of a sold out crowd. (a) Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets. (i)The price of tickets (ii)The quantity of tickets sold (b) The city of Toledo institutes an effective price ceiling on tickets. Explain where the price ceiling would be set. Explain the impact of the ceiling on each of the following. (i) The quantity of tickets demanded (ii) The quantity of tickets supplied (c) Will everyone who attends the circus pay the ceiling price set by the city of Toledo. Why or why not? 40