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
• Higher supply leads to •
lower equilibrium price and
higher equilibrium
quantity demanded
Lower supply leads to
higher equilibrium price and
lower equilibrium quantity
demanded
Supply and Demand Model Practice
Answer the following on a separate sheet of paper
Suppose we are analyzing the market for hot chocolate.
a) Winter starts and the weather turns sharply colder, consumers prefer hot chocolate.
b) The price of cocoa beans, an ingredient in making hot chocolate, decreases.
c) The Surgeon General of the United States announces that hot chocolate causes acne.
d) Protesting farmers stop producing millions of gallons of milk, causing the price of milk, an
ingredient in hot chocolate to rise.
S
D
Activator Chapter 6
• Plot the schedule below, which represents the demand for
water after a hurricane.
Price
QD
QS
S
6.00
$6
0
60
5
10
50
4
20
40
3
30
30
3.00
2
40
20
2.00
1
50
0
5.00
4.00
Price Ceiling
1.00
D
0
10
20
30
40
50
60
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
Input Costs
P
S1
$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
S
Activator Chapter 6
• Plot the schedule below, which represents the demand for
laborers in the market.
Price
QD
QS
Price Floor
S
7.25
$7.25
0
60
6.25
10
50
5.25
20
40
4.25
30
30
4.25
2.25
40
20
2.25
1
50
0
1.25
6.25
5.25
D
0
10
20
30
40
50
60
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
Price ceilings
Equilibrium
Price
D
Price ceiling
Price
S
S
D
4
4
3
3
Price
Ceiling
2
2
Shortage
100 200
800
Quantity
100
200
800
Quantity
Price Ceilings in Apartments
Price controls: price floors
Equilibrium
Price
Price floor
S
D
Price
4
Surplus
D
S
4
Price Floor
3
3
2
2
100
200
600
Quantity of
icecreams
100
200
600
Quantity of
icecreams
Minimum Wage Videos
 Stossel 2012 (dvd)
 http://www.youtube.com/watch?v=sZUZ8oJ9rfQ&list=PL68F7227FEB
0AD808&index=2
 http://www.youtube.com/watch?v=Ct1MoeaaW8&list=PL68F7227FEB0AD808&index=20
 http://www.youtube.com/watch?v=pwFVx4SG4Co&list=PL68F7227FE
B0AD808&index=10
Application – Price Ceiling
Price of
Ice
Cream
Cones
Supply
Equilibrium
point
$3
Price ceiling
2
Shortage
of 50 cones
Quantity
supplied
0
Demand
Quantity
demanded
75 100 125
Quantity 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.
Price of Ice
Cream
Cones
Quantity
Demanded
Quantity
Supplied
$3
100
100
2
125
75
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.
Application – Price Floor
Price of
Ice
Cream
Cones
$4
Surplus of 40
ce Cream
Cones
Supply
Price floor
3
Equilibrium
point
Demand
Quantity
supplied
0
Quantity
demanded
80 100 120
Quantity 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.
Price of Ice
Cream
Cones
Quantity
Demanded
Quantity
Supplied
$4
80
120
3
100
100
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.
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:
4.50
a. What is the market price? _________
280
b. What is the quantity demanded at the market price? _______
280
c. What is the quantity supplied at the market price? _________
On your graph, draw a line across your graph at the price of $4.00.
a. If the government were to set a price no higher than $4.00,
price ceiling
this would be called a __________________________
b. Use your answer in (a) to label the line on your graph at the
price of $4.00.
300
c. At a price of $4.00, the quantity demanded would be __________
240
d. At a price of $4.00, the quantity supplied would be __________
shortage
e. Is there a surplus or shortage of cheese? _____________
On your graph, draw a line across your graph at the price of $5.50.
a. If the government were to set a price no lower than $5.50, this would
price floor
be called a _________________
b. Use your answer in (a) to label the line on your graph at the price of
$5.50.
c. At a price of $5.50, the quantity demanded would be _____________
240
d. At a price of $5.50, the quantity supplied would be _____________
360
surplus
e. Is there a surplus or shortage of cheese? _____________________
2
1
50 100 150 200 250 300 350 400 450
18
Teacher Pay and Price Ceilings
Non-Binding Price Ceiling

Non- Binding Price Ceiling – price ceiling is above
equilibrium and thus has no effect on the equilibrium
Non-Binding Price Floor

Non- Binding Price Floor – price floor is below equilibrium
and thus has no effect on the equilibrium
Activator – Chapter 5 Elasticity
and its Application
1.
2.
3.
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
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
Elastic Demand
 Elastic – quantity demanded
changes drastically when a price
rises or falls
 A consumer is very responsive to
price changes
Inelastic Demand
 Inelastic - changes in price cause a
relatively small change in quantity
demanded
 Consumers continue to purchase
regardless of a price change
Slope of the Curve
P
P
P2
P2
P1
P1
D
0
QD
D
0
QD
Elastic Demand Curve
P
80,000
40,000
10,000
D
0
10
100
QD
Inelastic Demand Curve
P
$3.00
1.50
.50
D
0
2
3
QD
Determinants of Demand Elasticity
1.
Availability of Close Substitutes
•
2.
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
Elastic Supply
•
Elastic – suppliers can easily increase or decrease their quantity
supplied in the short run
•
Inelastic Supply
Inelastic – suppliers have difficulty changing the quantity
supplied
Elastic Supply Curve
P
S
10
1
0
5
20
QS
Inelastic Supply Curve
P
$3.00
1.50
.50
D
0
2
3
QD
Elasticity of Supply
Price per painting
S
P3
P2
D3
D2
D1
P1
1
Quantity of
paintings
Elasticity of Supply
Price per ticket
S
$1000
$500
$100
D3
D2
D1
80,000 Quantity of seats
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
Computing the Price
Elasticity of Demand



Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price
Percentage Change in QD – 25%
.25_ = 1.67
Elastic
.15
Percentage Change in Price – 15%


Percentage Change in QD – 10%
Percentage Change in Price – 15%
.10_
.15
= .67
Inelastic


Percentage Change in QD – 15%
Percentage Change in Price – 15%
.15_
.15
= 1
Unitary Elastic
Application – Elasticity of Ice Cream Cones
The Midpoint Method
(Q2 – Q1) / [(Q2+Q1) / 2]
Price Elasticity =
(P2 – P1) / [(P2 + P1) / 2]
Price
$7.00
Horizontal
is more
elastic
6.00
(Q2 – Q1) / [(Q2+Q1) / 2]
_10___
15
(P2 – P1) / [(P2 + P1) / 2]
$1___
$3.5
5.00
4.00
“E”
3.00
% change in qd
% change in price
= .67
= .29
= 2.3
.67_
.29
Elastic
2.00
1.00
0 5
10
15
20
25
30 35
Quantity Demanded of Ice-Cream Cones per week
The Midpoint Method
Price Elasticity =
Price
A
$10.00
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
B
A
B
8.00
10 – 8_
9
22%
22%
A
B
0
8
10
Quantity
=1
10 – 8__
9
.22
.22
$10 – 8_
$9
= .22
=1
= .22
Unitary Elastic
= .22
$10 – 8
9
Unitary Elastic
= .22
Application – Elasticity of Table Salt
Price Elasticity =
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
Price
$7.00
Vertical is
more
elastic
(Q2 – Q1) / [(Q2+Q1) / 2]
6.00
(P2 – P1) / [(P2 + P1) / 2]
5.00
4.00
“I”
% change in qd
% change in price
5 ___
12.5
= .40
$4___
$4
.40
1
=1
= .4
Inelastic
3.00
2.00
1.00
0 5
10
15
20
25
30 35
Quantity Demanded of Table Salt
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.
.67
20
10
10
20
10
15
• Q2 _______
- Q1_______
= ______
/ Q2 ______+
Q1 _______
/ 2 = _______
= ________
5
3
2 / P2 ______+
5
3
4
.50
• P2 _______
- P1_______
= ______
P1 _______
/ 2 = _______
= ________
.67
. 50
1.34
•- Elasticity QD______
/______P
= ________
•Did the price change cause an elastic or inelastic response in the QD for
Elastic
ice cream cones? ________________________________________________
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.
8
5
3
8
5
6.5
.46
• Q2 _______
- Q1_______
= ______
/ Q2 ______+
Q1 _______
/ 2 = _______
= ________
• P2 _______
- P1_______
= ______
/ P2 ______+
P1 _______
/ 2 = _______
= ________
6
2
4
6
2
4
1
.46 /______P
1
.46
•- Elasticity QD______
= ________
•Did the price change cause an elastic or inelastic response in the QD for
Inelastic
insulin? ________________________________________________
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
Price of a slice of pizza
Quantity Demanded
Per day
Total Revenue
$.50
300
150
$1.00
250
250
$1.50
200
300
$2.00
135
270
$2.50
100
250
$3.00
50
150
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
Price of
Nanos
QD per
week
150
200
150
125
125
250
0
200
250
QD
•Use the formula to show how you determine elasticity of demand for the graph.
250 - Q1_______
200 = ______
50 / Q2 ______+
250
200
225 = ________
.22
• Q2 _______
Q1 _______
/ 2 = _______
150 - P1_______
125 = ______
25 / P2 ______+
150
125 / 2 = _______
137.5 = ________
.18
• P2 _______
P1 _______
.22 P______P
.18
1.22
•- Elasticity QD______
= ________
•Did the price change cause an elastic or inelastic response in the QD for
Elastic
Nanos? ________________________________________________
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 __________%
18
22
4. To determine if this is a good decision for the firm, calculate the total revenue of each price:
150 x _______
200 = ___________________
$30,000
- Multiply the first price of the Nano by the first QD – $______
125 x _______
250 = __________________
$31250
- Multiply the second price of the Nano by the second QD – $ ______
125
5. Which price point generates the most total revenue? ______________________
.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*
20
Q2 – Q1__
________
.12
170
(Q2 + Q1)/2
= ________________
=
___________
1
P2 – P1__
________
.67
(P2 + P1)/2
1.5
Based on the above result, demand for Moonbucks coffee at this price range is
(elastic/unit elastic/inelastic)
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*
20
Q2 – Q1__
________
.22
90
(Q2 + Q1)/2
= ________________
=
___________
1
P2 – P1__
________
.18
(P2 + P1)/2
5.5
Based on the above result, demand for Moonbucks coffee at this price range is
(elastic/unit elastic/inelastic)
The Flaw in Point Elasticity of Demand
Percentage Change from the Original
Elasticity = Percentage change in Quantity Demanded/Percentage change in Price
%
Price
A
$10.00
B
10 – 8
10
A
B
8.00
Q
%
X 100
.20_ = -.8
-.25
A
B
8 – 10
8
X 100
-.25_ = -1.25
.20
0
8
10
Quantity
= .20
P
$8 – 10 X100 = -.25
$8
Inelastic
= -.25
$10 – 8 X100 = .20
$10
Elastic
Due Wednesday
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
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
Due Wednesday
1. Demand Curve Assignment
2. Chapter 4 Application
Worksheet
3. Supply and Demand Model
Practice
4. Video supply and demand
chart
5. Supply and demand review
6. Supply and Demand
Application
7. Elasticity of demand
8. Daily tens
9. Notes (4-6)
10. Terms