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?
Goods
Movie Tickets
Vacation cruise
Home computer
Matches
Chocolate
Gasoline
Water
Elastic?
Inelastic?
Measuring Elasticity from the Demand Side
% change in quantity demanded
Price Elasticity =
% change in price
• <1
• >1
• 1=1
Inelastic
Elastic
Unitary
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
• <1
• >1
• 1=1
Inelastic
Elastic
Unitary
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