1. economics
In the previous unit we took a look at different business organization types and costs that all business must deal with
In our next unit we will look at how supply and demand determine what products businesses offer to the market

2. Economics - notes Quantity
The amount of a commodity (good, service, or resource) that is produced, consumed, bought, sold, or exchanged.
The quantity of the good exchanged is measured on the horizontal axis and the price of the good is measured on the vertical axis

3. Economics - notes Demand Quantity Demanded
The desire to own something and the ability to pay for it
Quantity Demanded
The specific quantity of a good that buyers are willing and able to buy at a specific demand price
Should the price change, then buyers are likely to demand a different quantity

4. Economics - notes Law of Demand
The larger the demand for a good, the higher the price will be
If the price of a good increases, demand will decrease
If the price of a good decreases, demand will increase

5. Economics - notes Demand Price
The maximum price that buyers would be willing and able to pay for a given quantity of a good
Demand Schedule
A table that lists the quantity of a good a person will buy at each different price
Demand Curve
A graphical representation of a demand schedule, which shows the relationship between the demand price and quantity demanded

6. Quantity demanded per month
Demand Schedule
Price of a sweater
Quantity demanded per month $5 90
$10 80
$15 70
$20 60
$25 50
$30 40
$35 30
$40 20
$45 10
$50

7. Demand Curve

8. Economics - notes Change in the Demand Curve Ceteris Paribus
A demand curve is only accurate only as long as there are no changes other than price that could affect the consumer’s decision
In other words, a demand curve is accurate only as long as the ceteris paribus assumption is true
Ceteris Paribus
A Latin phrase that means “all other things held constant”

9. Economics - notes Change in the Demand Curve Continued…
When price changes, we move along the curve to show the change in demand as price changes
When other factors change, the demand curve shifts to the right or left depending on the change
A shift to the right shows an increase in demand
A shift to the left shows a decrease in demand

10. Economics - notes For Example
If the demand for Oodles of Noodles changed as a result of a change in price, the demand curve would look something like this:

11. Economics - notes

12. Economics - notes For Example
If the demand for Oodles of Noodles decreased as a result of something other than price, the demand curve would shift and look something like this:

13. Economics - notes

14. Economics - notes What factors can cause a shift in the Demand Curve?
A shift in the Demand Curve can be influenced by the Substitution Effect, the change in price of Complimentary Goods, and the Income Effect

15. Economics - notes Substitution Effect
When the price of a good rises, but the price of a substitute good remains the same, consumers react by consuming less of that good, and more of other similar goods
For Example
When the cost of gasoline rises, the amount of cars purchased and used in this country decreases
At the same time, the amount of travel by bus and train increases

16. Economics - notes Complement Goods
Two goods that are bought and used together
The change in demand for a compliment good can have an impact on one another
For Example
If the demand for skis rise, the demand for ski boots will rise as well
At the same time, if the price of skis rise, the demand for ski boots will fall

17. Economics - notes Income Effect
The change in consumption resulting from a change in income
For Example
If a consumer loses his or her job or takes a pay cut, they will consume less Normal Goods, and more Inferior Goods, which can lead to a change in demand for each type of good

18. Economics - notes Normal Good
A good that consumers demand more of when their income increases, and less of when their income decreases
For Example
Air Travel
Inferior Good
A good that consumers demand less of when their income increases, and more of when their income decreases
Public Transportation

19. economics
Pass out the “1 Shift in the Demand Curve” handout

20. economics
Pass out the “2 Elasticity of Demand” Handout

21. Economics - notes Answering the Elasticity of Demand Handout
The goods that would change the least in terms of the amount demanded would be considered more Inelastic
The goods that would change the most in terms of the amount demanded would be considered more Elastic

22. Economics - notes Inelastic
Describes demand for a product that changes little even when the price of that product changes
These goods or services are hard to replace
For example: Gas, Milk, Favorite Band, Life Saving Medication

23. Economics - notes Elastic
Describes demand for a product that changes greatly when the price of that product changes
These goods or services are easier to replace
For Example: Movie Tickets, Pizza, Vacation Destinations

24. Economics - notes Calculating Elasticity of Demand
% Change in Quantity Demanded = Elasticity
% Change in Price

25. Economics - notes Calculating Percentage Change
Original Number – New Number X 100 = Percentage Change
Original Number
****Ignore all negative numbers

26. Elasticity of demand For Example
First, calculate the percentage change for price and quantity demanded
Then, calculate the Elasticity of this product
Price of Pizza
Quantity Demanded
$.50
100 Slices
$1.00
50 Slices

27. economics
Have the class try the previous problem

28. Economics - notes Percentage Change in Price Answer
$.50 - $ X = 100% Change in Price
$.50
Percentage Change in Quantity Demanded
100 – 50 X = 50% Change in Quantity Demanded
100

29. Elasticity of Demand % Change in Quantity Demanded = Elasticity
% Change in Price
50 % = .5 is the Elasticity of Demand
100 %

30. Elasticity of Demand Measuring Elasticity
Elasticity Less Than 1 = Inelastic
Elasticity Greater Than 1 = Elastic
Elasticity Equal to 1 = Unitary Elastic

31. Economics - notes What Elasticity of Demand Tells Us
When a good at a particular price has Elastic Demand, raising the price of each unit sold will decrease the quantity sold by a larger percentage than the price increase
This will reduce a firm’s total revenue and would not be advisable
When a good or service at a particular price has Inelastic Demand, raising the price of each unit sold will decrease the quantity sold by a smaller percentage than the price increase
This will increase a firm’s total revenue and would be advisable

32. economics
Pass out “4 Elasticity of Demand Problems”

33. Demand Curve Resources
materials/DemandExamples/dshiftframes.htm
ill.html
upplydemand/demand/problems_1.html#explana tion4
gs/elasprob.html

34. Supply and Demand Curve Questions
Elasticity Problems
materials/DemandExamples/elasframes.htm
Supply and Demand Curve Questions
ill.html

35. Economics - notes Supply Quantity Supplied
The willingness and ability to sell a range of quantities of a good at a range of prices
Quantity Supplied
The specific amount of a good that sellers are willing and able to sell at a given price
Should the price change, then sellers are likely to supply a different quantity

36. Economics - notes Law of Supply
The larger the available supply, the lower the price
If the price of a good increases, more will be supplied
If the price of a good decreases, less will be supplied

37. Economics - notes Supply Price
The minimum price that sellers are willing and able to accept for a given quantity of a good
Supply Schedule
A table that lists the quantity of a good a person will supply at each different price
Supply Curve
A graphical representation of a supply schedule, which shows the relationship between the supply price and quantity supplied

38. Quantity supplied per month
supply Schedule
Price of a sweater
Quantity supplied per month $5
$10
100
$15
200
$20
300
$25
400
$30
500
$35
600
$40
700
$45
800
$50
900

39. Supply curve

40. Economics - notes Equilibrium Quantity Equilibrium Price
When the quantity demanded and quantity supplied are equal
In equilibrium, market shortages or surpluses have been eliminated
Equilibrium Price
The price at which the supply of an item equals the quantity demanded

41. Supply meets demand

42. Economics - notes A Market Without Balance Shortage
If the quantity demanded is not equal to the quantity supplied, then a market is faced with either a shortage or a surplus
Shortage
A shortage arises if the quantity demanded is greater that the quantity supplied, at a given price
In this case, buyers are not able to buy as much of the good as they would like
The price is likely to rise to restore balance
The higher price causes a decrease in quantity demanded and an increase in quantity supplied, both of which act to eliminate the shortage

43. Economics - notes Surplus
A surplus arises if the quantity demanded is less that the quantity supplied, at a given price
In this case, sellers are not able to sell as much of the good as they would like
The price is likely to fall to restore balance
The lower price causes an increase in quantity demanded and a decrease in quantity supplied, both of which act to eliminate the surplus

44. Economics - notes Supply Curve
A supply curve, like a demand curve, is only accurate as long as there are no changes other than price that could affect the consumer’s decision
In other words, a supply curve is accurate only as long as the ceteris paribus assumption is true

45. Economics - notes Disequilibrium
This occurs anytime there is shortage or surplus
A surplus can occur if the price for a particular good or service is too high

46. Economics - notes Disequilibrium Continued…
A shortage can occur if the price for a particular good or service is too low

47. Elastic demand curve

48. Reading the demand curve
Elastic Demand Curve
The demand curve is a negative slope, and if there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal
This flatter curve means that the good or service in question is elastic
Demand for elastic goods or services changes greatly with change in price

49. Reading the demand curve
Inelastic Demand Curve
Inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price

50. Inelastic demand curve

51. Reading the supply curve
Elastic Supply Curve
The supply curve is a positive slope, and works similarly to elasticity of demand
If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic

52. Reading the supply curve
Inelastic Supply Curve
On the other hand, if a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper it would be considered inelastic

53. Elasticity of supply Calculating Elasticity of Supply
Elasticity of Supply can be found the same way we find Elasticity of Demand

54. Elasticity of supply Calculating Elasticity of Supply
% Change in Quantity Demanded = Elasticity
% Change in Price

55. Elasticity of supply Calculating Percentage Change
Original Number – New Number X 100 = Percentage Change
Original Number
****Ignore all negative numbers

56. Economics - notes Elasticity of Supply and Time
Generally speaking, in the short run it is difficult for most firms to change output levels, making the supply of some goods and services inelastic in the short run
For Example
If an orange tree takes three years before an orange is produced, it is very difficult to increase the output of oranges in the short term

57. Economics - notes Elasticity of Supply and Time
Generally speaking, in the long run it is easier for firms to change output levels, making most goods and services more elastic in terms of supply in the long run
For Example
If an orange farmer plants additional orange trees, the supply of oranges in the long run will increase

58. economics Pass out “5 Shift in Supply and Demand Curve”
Pass out “6 Elasticity of Supply Problems”

59. Economics - notes
Is the supply of these goods and services elastic or inelastic (Short Term, Long Term)?
Answer the following and provide a brief explanation for each
Hotel Rooms in Ocean City, MD
Tickets to a Penn State Football Game
A Haircut at Malcolm’s
Nina’s Pizza

60. Economics - notes Hotel Rooms in Ocean City, MD
Short Term – Inelastic
The building of more hotels would take time
Long Term – Elastic
Over time it would be possible to build more hotels
Tickets to a Penn State football game
Adding seats to a stadium would take time
Over time it would be possible to add seats

61. Economics - notes A Haircut at Malcolm’s Nina’s Pizza
Short Term – Elastic
You can increase supply by hiring more workers or by adding shifts for your current employees
Long Term – Elastic
You can increase supply by expanding the size of the salon
Nina’s Pizza
You can increase supply by expanding the size of the restaurant or by purchasing additional equipment (more ovens)

62. economics
Jeopardy
Test