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Increases and Decrease in Demand

Increases and Decrease in Demand. Higher demand leads to higher equilibrium price and higher equilibrium quantity supplied. Lower demand leads to lower equilibrium price and lower equilibrium quantity supplied . Increases and Decreases in Supply.

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Increases and Decrease in Demand

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  1. Increases and Decrease in Demand • Higher demand leads to higher equilibrium price and higher equilibrium quantity supplied • Lower demand leads to lower equilibrium price and lower equilibrium quantity supplied

  2. Increases and Decreases in Supply • Lower supply leads to higher equilibrium price and lower equilibrium quantity demanded • Higher supply leads to lower equilibrium price and higher equilibrium quantity demanded

  3. Supply and Demand Model Practice • Answer the following on a separate sheet of paper • Suppose we are analyzing the market for hot chocolate. • Winter starts and the weather turns sharply colder, consumers prefer hot chocolate. • The price of cocoa beans, an ingredient in making hot chocolate, decreases. • The Surgeon General of the United States announces that hot chocolate causes acne. • Protesting farmers stop producing millions of gallons of milk, causing the price of milk, an ingredient in hot chocolate to rise. S D

  4. Activator Chapter 6 5.00 4.00 3.00 2.00 1.00 0 10 20 30 40 50 60 Plot the schedule below, which represents the demand for water after a hurricane. S 6.00 Price Ceiling D

  5. Price Ceilings • Price Ceiling – government imposed, legal maximum price that can be legally charged for a good/service • New York introduced rent control in the early 1940s as a way to provide affordable housing • Price ceiling causes a shortage in the amount of the product

  6. Input Costs P S1 S $7.25 x 40 hours = $290 $290 x 4 weeks = $1160 $1160 x 5 workers = $5800 $5800 x 12 months = $69,600 $9.00 x 40 hours = $360 $360 x 4 weeks = $1440 $1160 x 5 workers = $7200 $5800 x 12 months = $86,400

  7. 6.25 5.25 4.25 2.25 1.25 0 10 20 30 40 50 60 Activator Chapter 6 Plot the schedule below, which represents the demand for laborers in the market. Price Floor S 7.25 D

  8. Price Floor • Price Floor – government imposed, legal minimum price at which a good can be sold • Minimum wage is a well-known price floor • Minimum wage can cause a surplus of workers

  9. Price Price S S D D 4 4 3 3 2 2 Quantity Quantity 200 200 100 800 100 Price ceilings Price ceiling Equilibrium Price Ceiling Shortage 800

  10. Price Ceilings in Apartments

  11. Price Price S S D D 4 4 3 3 2 2 Quantity of icecreams Quantity of icecreams 100 200 200 100 600 Price controls: price floors Price floor Equilibrium Surplus Price Floor 600

  12. Minimum Wage Videos • Stossel 2012 (dvd) • http://www.youtube.com/watch?v=sZUZ8oJ9rfQ&list=PL68F7227FEB0AD808&index=2 • http://www.youtube.com/watch?v=Ct1Moeaa-W8&list=PL68F7227FEB0AD808&index=20 • http://www.youtube.com/watch?v=pwFVx4SG4Co&list=PL68F7227FEB0AD808&index=10

  13. Application – Price Ceiling Price of Ice Cream Cones Scenario: the government places a price ceiling on ice cream cones as a result of complaints and lobbying from the Ice-Cream Eaters of America. The price ceiling is at $2.00 a cone. Graph the following schedule based on the price points and qs/qd. Equilibrium point $3 Shortage of 50 cones Price ceiling 2 Quantity supplied Quantity demanded Supply 125 75 100 Demand 0 The government imposes a price ceiling of $2. Because the price ceiling is below the equilibrium price of $3, the market price equals $2. At this price, 125 cones are demanded and only 75 are supplied, so there is a shortage of 50 cones. Quantity of Ice-Cream Cones

  14. Application – Price Floor Price of Ice Cream Cones Scenario: the government places a price floor on ice cream cones as a result of complaints and lobbying from the National Organization of Ice-Cream Makers. The price floor is at $4.00 a cone. Graph the following schedule based on the price points and qs/qd. $4 3 Surplus of 40 ceCream Cones Equilibrium point Price floor Quantity supplied Quantity demanded Supply 120 80 100 Demand 0 The government imposes a price floor of $4, which is above the equilibrium price of $3. Therefore, the market price equals $4. Because 120 cones are supplied at this price and only 80 are demanded, there is a surplus of 40 cones. Quantity of Ice-Cream Cones

  15. A store sells cheddar cheese by the pound. The schedule reflects the quantity demanded and the quantity supplied for the different prices the cheese could be sold. $6 5 4 3 • Answer the following question: • What is the market price? _________ • What is the quantity demanded at the market price? _______ • What is the quantity supplied at the market price? _________ • On your graph, draw a line across your graph at the price of $4.00. • If the government were to set a price no higher than $4.00, this would be called a __________________________ • Use your answer in (a) to label the line on your graph at the price of $4.00. • At a price of $4.00, the quantity demanded would be __________ • At a price of $4.00, the quantity supplied would be __________ • Is there a surplus or shortage of cheese? _____________ On your graph, draw a line across your graph at the price of $5.50. • If the government were to set a price no lower than $5.50, this would be called a _________________ • Use your answer in (a) to label the line on your graph at the price of $5.50. • At a price of $5.50, the quantity demanded would be _____________ • At a price of $5.50, the quantity supplied would be _____________ • Is there a surplus or shortage of cheese? _____________________ 4.50 280 2 280 1 price ceiling 50 100 150 200 250 300 350 400 450 300 240 shortage price floor 240 360 surplus

  16. Teacher Pay and Price Ceilings

  17. Non-Binding Price Ceiling • Non- Binding Price Ceiling – price ceiling is above equilibrium and thus has no effect on the equilibrium

  18. Non-Binding Price Floor • Non- Binding Price Floor – price floor is below equilibrium and thus has no effect on the equilibrium

  19. Activator – Chapter 5 Elasticity and its Application • List an item that you would buy less of if the price increased • List an item that you would buy more of if the price decreased • List an item that you would continue to buy, even if the increased

  20. Elasticity • Elasticity – measure of the responsiveness of quantity demanded or quantity supplied to a change in price • Price elasticity of demand – measures how consumers will cut back or increase their quantity demanded for a product when prices rise or fall • Measures the extent to which changes in price causes changes in quantity demanded. • Helps determine how much a price change will influence the qd of any given product

  21. Elastic Demand • Elastic – quantity demanded changes drastically when a price rises or falls • A consumer is very responsive to price changes

  22. Inelastic Demand • Inelastic - changes in price cause a relatively small change in quantity demanded • Consumers continue to purchase regardless of a price change

  23. Slope of the Curve P P P2 P2 P1 P1 D D 0 0 QD QD

  24. Elastic Demand Curve P 80,000 40,000 10,000 D 0 10 QD 100

  25. Inelastic Demand Curve P $3.00 1.50 .50 D 0 2 3 QD

  26. Determinants of Demand Elasticity • Availability of Close Substitutes • Pepsi/Coke, Butter/Margarine • Necessities versus Luxuries • Medicine versus a luxury automobile • 3. Definition of the Market • Food – broad category (inelastic) • Ice Cream – narrower (more elastic) • Vanilla Ice Cream – very narrow category (very elastic) • 4. Time Horizon • Longer time horizon – more elastic • Gas in the short run is inelastic, but over time elastic

  27. Elastic Supply • Elastic – suppliers can easily increase or decrease their quantity supplied in the short run

  28. Inelastic Supply • Inelastic – suppliers have difficulty changing the quantity supplied

  29. Elastic Supply Curve P S 10 1 0 5 20 QS

  30. Inelastic Supply Curve P $3.00 1.50 .50 D 0 2 3 QD

  31. Elasticity of Supply Price per painting S P3 P2 D3 P1 D2 D1 1 Quantity of paintings

  32. Elasticity of Supply Price per ticket S $1000 $500 D3 $100 D2 D1 Quantity of seats 80,000

  33. Computing the Price Elasticity of Demand • Price elasticity of demand = Percentage change in quantity demanded Percentage change in price • Value is less than 1, it is considered inelastic. • Inelastic – Demand is < 1 • Value is greater than one, demand is elastic. • Elastic – Demand is > than 1 • Value is equal to one, demand is unitary elastic. • Unitary Elastic – Demand is = 1 • Value is equal to 0, demand is perfectly inelastic. • Perfectly Inelastic – Demand is = 0 • Value is equal to infinity, demand is perfectly elastic • Perfectly Elastic – Demand is = infinity

  34. Computing the Price Elasticity of Demand • Price elasticity of demand = Percentage change in quantity demanded Percentage change in price • Percentage Change in QD – 25% • Percentage Change in Price – 15% • Percentage Change in QD – 10% • Percentage Change in Price – 15% • Percentage Change in QD – 15% • Percentage Change in Price – 15% .25_ .15 = 1.67 Elastic .10_ .15 = .67 Inelastic .15_ .15 = 1 Unitary Elastic

  35. Price $7.00 6.00 5.00 3.00 2.00 1.00 0 5 10 15 20 25 30 35 Quantity Demanded of Ice-Cream Cones per week Application – Elasticity of Ice Cream ConesThe Midpoint Method (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] _10___ 15 = .67 Horizontal is more elastic “E” $1___ $3.5 = .29 (P2 – P1) / [(P2 + P1) / 2] = 2.3 .67_ .29 • % change in qd % change in price 4.00 Elastic

  36. Price $10.00 8.00 8 10 0 Quantity The Midpoint Method (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] Price Elasticity = A = .22 $10 – 8_ $9 10 – 8_ 9 = .22 B A B 22% 22% = 1 Unitary Elastic $10 – 8 9 = .22 10 – 8__ 9 = .22 A B .22 .22 Unitary Elastic = 1

  37. Price $7.00 6.00 5.00 3.00 2.00 1.00 0 5 10 15 20 25 30 35 Quantity Demanded of Table Salt Application – Elasticity of Table Salt (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] Price Elasticity = 5 ___ 12.5 = .40 (Q2 – Q1) / [(Q2+Q1) / 2] Vertical is more elastic “I” $4___ $4 = 1 (P2 – P1) / [(P2 + P1) / 2] .40 1 = .4 • % change in qd % change in price 4.00 Inelastic

  38. Elasticity Application 1 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] • Use the formula to show how you determine elasticity of demand for the graph. • Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________ • P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________ • - Elasticity QD______ /______P = ________ • Did the price change cause an elastic or inelastic response in the QD for ice cream cones? ________________________________________________ .67 20 10 10 20 10 15 5 3 2 5 3 4 .50 .67 . 50 1.34 Elastic

  39. Elasticity Application 2 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] • Use the formula to show how you determine elasticity of demand for the graph. • Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________ • P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________ • - Elasticity QD______ /______P = ________ • Did the price change cause an elastic or inelastic response in the QD for insulin? ________________________________________________ 8 5 3 8 5 6.5 .46 6 2 4 6 2 4 1 .46 1 .46 Inelastic

  40. Total Revenue • Total Revenue – the total amount paid by buyers and received by sellers of a good; total amount of money generated by the firm through sales • Price of the goods x quantity demanded = Total Revenue

  41. Elasticity Application 3 Scenario: The Apple store in St. John’s Mall made the decision to drop the price of their Ipod Nano from $150 to $125. As a result, the sale of Nano’s increased from 200 a week to 250. - Create a Demand Schedule and Curve based on the above information. Price Per Ipod Nano 150 125 150 125 200 250 200 250 • Use the formula to show how you determine elasticity of demand for the graph. • Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________ • P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________ • - Elasticity QD______ P______P = ________ • Did the price change cause an elastic or inelastic response in the QD for Nanos? ________________________________________________ 250 200 50 250 200 225 .22 150 125 25 150 125 137.5 .18 .22 .18 1.22 Elastic QD 0 Elastic 2. Did the price change cause an elastic or inelastic response in the QD for Nano’s? ___________________ 3. If the firm drops their price by _________%, they will see an increase in sales of __________% 4. To determine if this is a good decision for the firm, calculate the total revenue of each price: - Multiply the first price of the Nano by the first QD – $______ x _______ = ___________________ - Multiply the second price of the Nano by the second QD – $ ______ x _______ = __________________ 5. Which price point generates the most total revenue? ______________________ 18 22 150 200 $30,000 125 250 $31250 125

  42. .18 • What is the price elasticity of demand when the price changes from $1 to $2? _________*Use the midpoint method formula to determine the answer to #1* • Q2 – Q1__ ________ (Q2 + Q1)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/2 20 .12 170 1 .67 1.5 Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)

  43. 1.22 • What is the price elasticity of demand when the price changes from $5 to $6? _________*Use the midpoint method formula to determine the answer to #1* • Q2 – Q1__ ________ (Q2 + Q1)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/2 20 .22 90 1 .18 5.5 Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)

  44. Price $10.00 8.00 8 10 0 Quantity The Flaw in Point Elasticity of DemandPercentage Change from the Original Elasticity = Percentage change in Quantity Demanded/Percentage change in Price % Q% P A = -.25 $8 – 10 X100 $8 10 – 8 X 100 10 = .20 B A B .20_ -.25 = -.8 Inelastic $10 – 8 X100 $10 = .20 8 – 10 X 100 8 = -.25 A B -.25_ .20 = -1.25 Elastic

  45. Due Wednesday Determinants of Supply Video Supply and Demand Practice Supply and Demand Application Supply and Demand Review Tennis Ball Simulation SQ3R Prices & Supply and Demand Crossword Puzzle Study Guide Terms Essential Questions Standards Sheet & Test Corrections Notes Daily Tens

  46. Due Wednesday Demand Curve Assignment Chapter 4 Application Worksheet Supply and Demand Model Practice Video supply and demand chart Supply and demand review Supply and Demand Application Elasticity of demand Daily tens Notes (4-6) Terms

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