Supply and Demand II Lesson 12 – 5a & 5b

The Ripple Effect: One small change in the market can cause a ongoing change in everything it is connected to. Example: Price of Oil tripples, then people might not be able to afford to drive to work, then public services might get cut, food prices will rise , ect…

Price Elasticity: Measurement of how sensitive consumers are to price changes. Would the amount of Pizza’s you buy change a lot if the price went up by $1? Measurement of how sensitive consumers are to price changes. Would the amount of Pizza’s you buy change a lot if the price went up by $1?

Elasticity continued Elasticity refers to the responsiveness that a Good or Service has to the change in a different factor influencing that good or service If that same pizza increased its price by $10 then how likely do you think it would be that you would buy the same number of pizzas on a regular basis? This sensitivity to change in price is what elasticity refers to. If that same pizza increased its price by $10 then how likely do you think it would be that you would buy the same number of pizzas on a regular basis? This sensitivity to change in price is what elasticity refers to.

Price elasticity of Demand: If we increased the price of a pizza by 10% And due to that increase, if sales of that pizza then dropped by 20% Then the elasticity of that pizza would be -2

Economist don’t look at -/+’s so an elasticity of 2 represents a great deal of change. (However) if that same 10% increase in price resulted in a 5% decrease in sales then the elasticity would be ½ (.5) which is a low number = any number less then 1 means it is inelastic

Inelastic demand: quantity demanded by consumers remains the same no matter what the price is. Elastic Demand : quantity demanded changes, however price is constant (think souvenir t-shirts) Inelastic demand: quantity demanded by consumers remains the same no matter what the price is. Elastic Demand : quantity demanded changes, however price is constant (think souvenir t-shirts)

Elastic: Demand is responsive to price changes Many substitutes to choose from Lot of choices, flexible, easy to change

Inelastic: Price changes have little effect on demand for a certain good. More price change Ridged, not flexible, limited choices

Unit Elastic: Unit elastic is the middle point or dividing line between a good or service’s elasticity and when it is inelastic. If a g or s is “unit elastic” then the percent of change in price will be exactly the same as the percent of change in quantity demanded. (A price increase of 10% will result in a quantity change of 10%)

Unit elastic is the middle point or dividing line between a good or service’s elasticity and when it is inelastic. If a g or s is “unit elastic” then the percent of change in price will be exactly the same as the percent of change in quantity demanded. (A price increase of 10% will result in a quantity change of 10%)

Total Revenue:

Total Revenue Test: Why does stuff cost what it costs? TR=P*Q If purchases increase enough (elastic) after a price drop then it’s all Good. If the price drops by 10% but the demand increases by more than 10% the supplier wins. Demand is inelastic if there is a price drop but the demand does not increase enough. If the change in quantity demanded is less than the change in price, total revenue will decrease.

Income Elasticity of a Good: Measure of how responsive demand for a good or service is when people who are demanding that good have a change in their income. Price stays the same but demand Goes up. Example: New clothing Most Goods are income elastic. What happens to the demand curve?

Price Elasticity of supply It’s a measure of how responsive producers are to price changes. If producers react to rising or falling prices by Greatly changing how much they produce, then supply is elastic. More elastic in the long run than the short run.

Price Elasticity of Supply: Rate of how responsive supply is in accordance to a price change in a good/service.