1. 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

2. Elasticity shows how sensitive Quantity is to Change in Price.

3. 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. 4 Types of Elasticity Elasticity of Demand Elasticity of Supply
Cross-Price Elasticity (Substitute or Complement)
Income Elasticity (Normal or Inferior)

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

6. 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.

7. 1. Elasticity of Demand
Elastic
Inelastic

8. 1. Elasticity of Demand
Elastic
Inelastic

9. 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

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

11. 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

12. 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

13. 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

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

15. 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

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

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

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

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

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

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

22. Elasticity Practice

23. 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?

24. 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.

25. 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

26. 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

27. 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

28. 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%

29. 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

30. 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

31. 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

32. 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?

33. 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

34. 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

35. 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%…

36. Password
Demand
Substitute
Inferior Good
Elastic
Total Revenue Test

37. Password
Subsidy
Supply
Excise Tax
Inelastic
Elasticity Coefficient

38. Elasticity Practice 38

39. 39

40. (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