1. Supply and Demand: Section 9 Finally getting into Microeconomics

2. Behind the Curves First what can shift a supply curve? R O T E N Second, what can shift a demand curve? T R I B E esources ther goods echnology axes xpectations (producers) umber of producers aste elated goods ncome uyers (number of) xpectations

3. Substitutes and Complements What is a substitute? How does this affect/relate demand for a good? A complement? How does this affect/relate to demand for a good?

4. Elasticity Explained Elastic Consumers are very responsive Will change purchasing behavior quickly Inelastic Consumers are NOT very responsive Will not change purchasing behaviors quickly Unit Elastic Consumer behavior changes directly proportional to price/quantity changes

5. Consumer Choice Substitution Effect Prices, Demand Opportunity costs We substitute the cheaper good for the one we would have purchased = substitution effect

6. Consumer Choice Substitution effect – has greatest bearing on goods that we rarely purchase Examples? Income effect Change in the quantity of a change in the purchasing power of a consumers income Housing – prices go up, we buy smaller/cheaper houses Other examples?

7. Consumer Choice Most goods are NORMAL goods Income, demand People start to buy inferior goods Giffen Goods Theory, never proven Inferior goods = prices increase Ex: Irish and potatoes

8. Consumer Choice Elasticity Independent/dependent variables and price What else affects a good’s price? Substitutes and compliments Question to ask: NOT IF a dependent good (compliment) will change due to price increases BUT how much will the quantity demanded decrease/increase? Elasticity – measure how responsive the quantity demanded is to a change in price

9. Consumer Choice Price elasticity of demand Flu shot vaccine example

10. Time to do research!

11. Consumer Choice Magic number with Elasticity is 1 Below 1 – inelastic Demand will change a relatively small amount when price changes Examples: Gas Health care Flu shots Crack rocks? Above 1 – elastic Demand will change in greater amounts if price changes Examples: Restaurant meals Housing Foreign Travel 1 = unit elastics

12. Consumer Choice Interpreting Price Elasticity of Demand How elastic IS elastic? Perfectly inelastic No matter the price of a good, the quantity demand stays

13. Consumer Goods Perfectly elastic A tiny price change will cause the quantity demanded to change

14. Consumer Choice Why does the elasticity of a good matter? Crucial to know how price changes affect TOTAL REVENUE = P x Q sold

15. Consumer Choice Besides rare cases of perfectly inelastic or perfectly elastic goods, two effects are important and can be found using elasticity Price effect – Price = price, raises revenue Quantity Effect – Price = products sold, lowers revenue

16. Consumer Choice Price elasticity of demand tells us what happens when price changes, and the size of that effect Unit-elastic (price elasticity of d = 1) Increase in price does not change total revenue Inelastic (price elasticity of d < 1) Higher price increases total revenue Price effect is stronger than quantity effect Elastic (price elasticity of d > 1) Increase in price reduces revenue Quantity effect is stronger than price effect

17. Consumer Choice What factors determine the price elasticity of demand? Are close substitutes available? Ex: difference between Pepsi and Coke Is the good a necessity or luxury? Ex: Ferrari What share of income is spent on the good? Ex: Starbucks Time Ex: Gas crisis in the 1970s

18. Thinking about what we know about economics so far… Should price elasticity affect a person’s choice of college?

20. Consumer Choice Further Elasticities of Demand (and Supply) Demand for a good is often affected by the price of other, related goods If a price changes for hot dogs, how much does this affect demand for hamburgers? Cross-Price Elasticity for Demand = %∆ Q d for Good A %∆ in Price of B o When two goods are substitutes, Cross-Price Elasticity is Positive (shift demand curve of Good B to the right) o When goods are compliments, hot dogs and hot dog bunds, CPE is negative (shift left of Good B) **The (+) or (-) sign matters here**

21. Consumer Choice Income Elasticity of Demand Changes in income affect a good = %∆ in Q d %∆ in income o Income Elasticity is (+) – Normal good o Income Elasticity is (-) – Inferior good o Income Elasticity (normal goods) o Income – elastic (>1) o If income rises, the demand for a good rises FASTER than rise in income o Income – inelastic ( 0) o When income rises, the demand for a good is SLOWER than rise in income

22. Consumer Choice Price Elasticity of Supply The response of producers to price changes Examples – produce more products, reduce production Price Elasticity of Supply = %∆ in Qs %∆ in price o Same rules as Demand Elasticities, just along the supply curve

23. Consumer Choice

24. What factors determine the Price Elasticity of Supply? Availability of inputs Too few inputs means higher cost of production Time Response of producers to inputs, prices Ex – Fish supply, pizza, cell phone radio spectrum