Demand Review You have 30 minutes to complete the handout. Work individually to ensure that YOU understand each and every question. Don’t just sit there, if you have a question, ASK!!

ELASTICITY OF DEMAND Think of a product that you would still buy regardless of price and a product that you wouldn’t buy if the price changed even by a little. THE EXTENT TO WHICH A CHANGE IN PRICE CAUSES A CHANGE IN THE QUANTITY DEMANDED

ELASTIC DEMAND  SMALL CHANGE IN PRICE CAUSES LARGE CHANGE IN QUANTITY DEMANDED  “FLATTER” DEMAND CURVE  EXAMPLE: NEIGHBORING GAS STATIONS (PENNY WARS)

INELASTIC DEMAND  CHANGE IN PRICE CAUSES SMALLER CHANGE IN QUANTITY DEMANDED  MORE VERTICAL DEMAND CURVE  EXAMPLES: INSULIN, GAS AFTER KATRINA

Go Ahead…Take A Guess!!

  Prices convey information to both producer and consumer.  Consumers – when price is high - I won’t buy, but when price is low – I want mo.  Producers – when price is high – I will supply, but when price is low - ?????????  Prices help answer the (3) economic questions What do prices do?

  1. They don’t favor either party – they result because of competition  Why can’t Chicken Run charge $500 for chicken fingers? OTHER IMPORTANT INFORMATION ABOUT PRICES

  2. They are flexible – allows for change  Disasters, weather, war effect price and people adjust  This is most often seen with products with which type of demand? I don’t have anything to write up here

  3. They provide choice – if they become too high, people can go elsewhere Don’t have anything for here either

  4. Markets find their prices without outside help  Government does get involved as we will see Thought I had something for here…but I don’t

  5. Prices are efficient – people can make decisions about purchases and behavior quickly  Example: Taxes Stop looking up here!

  It is being sold for $1 and is still on the market! It was originally listed at $900 and has steadily been reduced. What do you think is the price for this house?

  Draw a supply curve and demand curve on the same graph.  Label everything.  Find a point on the graph that represents the price and quantity that should be charged.  Label that point “E”. So how do we get to a price?

 What is point E called?

  What happens if price falls above this point?  What happens if price falls below this point?  How do shifts in Demand and Supply effect quantity and price? The big questions:

 This price leaves me too many - SURPLUS

 This price leaves me too few - SHORTAGE

 This one is just right!

  Despite this efficiency, producers and consumers can convince the government that prices are too high or too low.  This why we are a mixed market in reality…some government involvement  Page 151 – 152: Describe the two types of price controls AND Draw them.

 PRICE CEILINGS  Sets the MAXIMUM price that can be charged for a good in cases where CONSUMERS feel the price is too high

 PRICE FLOORS  Sets the MINIMUM price for a product in cases where PRODUCERS feel prices are too low

 The upside-down house rule  The floor’s up high and the ceiling is down low.

  What is the quantity demanded at a price of $25? At $20?  What is the quantity supplied at a price of $15? At $25  How large is the shortage or surplus at $10? EXPLAIN.  If the price started at $10 today, what would likely happen to the price tomorrow? Why?

  SSEMI1  1. What are the components of the Circular Flow of Economic Activity, and in which direction do money and resources flow.  SSEMI2  2. What is the Law of Demand.  3. What is the Law of Supply.  4. What is the “market clearing price,” and how do buyers and sellers work together to determine it?  5. Explain how prices serve as an incentive to both buyer and seller in a market economy. SSEMI 1 – 3 Review

  SSEMI3  6. What are the causes for changes in supply and demand.  7. What causes a surplus? What causes a shortage? Which is caused by a price floor? A price ceiling?  8. Where do these price controls appear in relation to equilibrium price?  9. What is the elasticity of demand?