Putting It Together

Demand and supply are the two forces that make market-based economies work Demand Demand reflects what consumers are willing and able to purchase at various prices. Supply Supply reflects what producers are willing and able to produce at various prices. Economists use elasticity as a tool for measuring how responsive consumers and producers are to price changes

Elasticity of Demand Elasticity of demand is a measure of consumers sensitivity to a change in price

What influences Demand Elasticity? Availability of substitutes Product price relative to income Necessity or luxury? (addiction) Time needed to adjust to price change

Think about these…elastic or inelastic? GoodsElastic?Inelastic? Movie Tickets Vacation cruise Home computer Matches Chocolate Gasoline Water

Measuring Elasticity from the Demand Side % change in quantity demanded Price Elasticity = % change in price <1 Inelastic >1Elastic 1=1Unitary

Let’s try it Suppose the price of toothpaste rises from $2 to $3. This is a 50% increase. Also suppose consumers reacted by buying 9% fewer tubes of toothpaste. Is the demand for toothpaste elastic or inelastic?

Let’s try it Again Suppose the price of energy bars rises from $2 to $3. This is a 50% increase. Also suppose consumers reacted by buying 80% fewer energy bars. Is the demand for energy bars elastic or inelastic?

Elasticity of Supply Elasticity of supply measures the responsiveness of the quantity supplied to changes in the product’s price.

The Supply Chain Factors that influence the elasticity of supply (affects producers ability to adjust their supply as prices change) 1.Availability of inputs 2.Mobility of inputs (ability to move goods quickly) 3.Storage capacity (fresh fruit vs. toothpaste) 4.Time needed to adjust to a price change (prices may be inelastic in short run, but more elastic over time)

Measuring Elasticity from the Supply Side % change in quantity supplied Price Elasticity = % change in price <1Inelastic >1Elastic 1=1Unitary

Let’s Try It Suppose banana growers react to a 50% rise in the price of bananas by supplying only 25% more fruit to consumers. Is the supply of bananas elastic or inelastic?

Let’s Try It Again Suppose yogurt producers react to a 50% rise in the price of bananas by increasing their supply by 150%. Is the supply of yogurt elastic or inelastic?

Review Activity Demand and Supply shifters Working in groups, complete Headline activity Decide if headline is demand or supply shifter (or neither) Draw out the demand and supply curves and shifts on your paper Be prepared to share/defend your answers

Surplus, Shortage & Equilibrium