Using Supply and Demand 4 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

Price elasticity of demand, E D _________________ of quantity demanded to a change in __________ Percentage ________ in quantity demanded _________ by the percentage change in price ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Price Elasticity of Demand

Elastic demand Quantity ________ is responsive to even a small change in price Inelastic demand A huge change in ________ results in only a _______ change in quantity demanded ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Price Elasticity of Demand

Elastic demand, E D > 1 __________ change in quantity demanded is greater than the percentage change in _____ Perfectly elastic demand, E D = ∞ The demand curve is horizontal Even the ________ change in price will lead to a huge change in quantity ____________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Price Elasticity of Demand

Elastic Demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 EXHIBIT 4.1 a. Elastic Demand (E D > 1)b. Perfectly Elastic Demand (E D = ∞) Price Quantity 0 P2P2 P1P1 Demand Q2Q2 Q1Q1 Price Quantity 0 P1P1 Demand

__________ demand, E D < 1 Percentage change in quantity demanded is less than the __________ change in price Perfectly inelastic demand, E D = 0 The demand curve is ___________ The quantity demanded ______ _____ respond to a change in price Unit _________ demand, E D = 1 Percentage change in ________ demanded is equal to the percentage change in ______ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Price Elasticity of Demand

Inelastic Demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 EXHIBIT 4.2 a. Inelastic Demand (E D < 1)b. Perfectly Inelastic Demand (E D = 0) Price Quantity 0 P2P2 P1P1 Demand Q2Q2 Q1Q1 Price Quantity 0 Demand Q 1 = Q 2 P2P2 P1P1

Unit Elastic Demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 EXHIBIT 4.3 Price Quantity 0 P2P2 P1P1 Demand Q2Q2 Q1Q1

Short-Run and Long-Run Demand Curves ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 EXHIBIT 4.4 Price of Gasoline Quantity of Gasoline 0 P2P2 P1P1 D SR D LR Q1Q1 Q SR Q LR

Price Elasticities of Demand for Selected Goods ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 EXHIBIT 4.5

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Total Revenue and Price Elasticity of Demand

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Total Revenue and Price Elasticity of Demand

Elastic Demand and Total Revenue ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 EXHIBIT 4.6 D ELASTIC Price Quantity $10 $5 A B a ($200) b ($200) c ($300)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Total Revenue and Price Elasticity of Demand

Inelastic Demand and Total Revenue ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 EXHIBIT 4.7 D INELASTIC Price Quantity $10 $5 A B a ($150) b ($150) c ($50)

a b c Price Elasticity along a Linear Demand Curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 EXHIBIT 4.8 Demand Price Quantity 0 P1P1 P2P2 a. Elastic Rangeb. Inelastic Range Q1Q1 Q2Q2 E D = 1 Unit elastic d e f Demand Price Quantity 0 P3P3 P4P4 Q3Q3 Q4Q4 E D = 1; Unit elastic

Price elasticity of supply, E S __________ of quantity supplied to a change in price Percentage change in quantity ________ divided by the percentage change in price ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Price Elasticity of Supply

Elastic supply, E S > 1 Percentage change in quantity supplied is _______ than the percentage change in price Inelastic supply, E S < 1 Percentage ______ in quantity supplied is less than the percentage change in price Perfectly elastic supply, E S = ∞ The supply curve is __________ The price does not change at all ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Price Elasticity of Supply

Perfectly inelastic supply, E S = 0 The supply curve is _________ An increase in price will not change the quantity __________ Time: ________ in supply elasticities Supply tends to be more _______ in the long run than in the short run ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Price Elasticity of Supply

The Price Elasticity of Supply ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 EXHIBIT 4.9 a. Elastic Supply (E S > 1)b. Inelastic Supply (E S < 1) Price Quantity 0 P2P2 P1P1 Supply Q2Q2 Q1Q1 Price Quantity 0 P2P2 P1P1 Supply Q2Q2 Q1Q1

Q1Q1 The Price Elasticity of Supply ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 EXHIBIT 4.9 c. Perfectly Inelastic Supply (E S = 0) d. Perfectly Elastic Supply (E S = ∞ ) Price Quantity 0 P2P2 P1P1 Price Quantity 0 Supply P1P1

Short-Run and Long-Run Supply Curves ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 EXHIBIT 4.10 Price Quantity 0 P2P2 P1P1 S SR S LR Q1Q1 Q SR Q LR

Consumer surplus Difference between the price a ____________ is willing and able to pay For an additional unit of a good And the price the consumer actually pays Consumer surplus for the whole market _____ of all the individual consumer surpluses Marginal willingness to pay Falls as greater quantities are _____________ In any period Demand curve A marginal benefit curve Additional benefit ________ from consuming one more unit ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Consumer Surplus

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 EXHIBIT 4.20 Quantity of Chocolate (billions of pounds per year) Price 0 Consumer surplus in the market Market price P1P1 Market Demand Q1Q1 Marginal willingness to pay for last unit

Impact of an Increase in Supply on Consumer Surplus ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 EXHIBIT 4.21 Quantity of Chocolate (billions of pounds per year) Price 0 Q 1 can now be purchased at a lower price P2P2 Market Demand Q2Q2 A lower price makes it advantageous for buyers to expand their purchases S1S1 S2S2 P1P1 Q1Q1 B C D A

Producer surplus Difference between what a ________ is paid for a good and the cost of producing one unit of that ________ Supply curve is the marginal cost curve Reflects the marginal cost to sellers Cost of producing ______ more unit of a good Change in _______ costs resulting from a one-unit change in output Producer surplus for the market Sum of all the producer surpluses of all the sellers Area above the _________ supply curve and below the market price Up to the quantity actually produced How much sellers gain from trading in the market ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Producer Surplus

Producer Surplus Market Producer Surplus ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 EXHIBIT 4.23 Quantity per Week Price 0 Market price $5 Market Supply 50,000

Impact of an Increase in Demand on Producer Surplus ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 EXHIBIT 4.24 Quantity Price 0 A higher price for quantity already being produced P1P1 D1D1 Q2Q2 Expansion of output from Q 1 to Q 2 made profitable because of higher price Market Supply P2P2 Q1Q1 B A D2D2 D C

Demand curve ____________ prices that consumers are willing and able to pay For additional quantities of a good or service ___________ benefits derived by consumers Supply curve ___________ prices that suppliers require to be willing and able to supply Each additional unit of a good or service Marginal cost of production Market equilibrium Marginal benefit to ________ is equal to the marginal cost to producers, MB = MC Maximize total welfare gains Market efficiency Total welfare gains Sum of consumer and producer __________ Deadweight loss Net loss of total surplus that results from an action that alters a market equilibrium ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Market Efficiency

Consumer and Producer Surplus ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 EXHIBIT 4.25 Market Demand = MB Market Supply = MC E C D B A CS PS MB > MC Output too low MC > MB Output too high Quantity (millions of units/year) Price $

Super Bowl High-demand, _______-supply sports event At the face value for the tickets Quantity demanded far ________ the quantity supplied Fans are willing to pay much ______ prices to scalpers ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Efficiency and Ticket Scalping

__________ Voluntary activity that benefits both buyers and sellers Helps markets achieve efficient outcomes Transfer tickets from those placing lower values on them To those placing higher values on them ________ of the event are the losers ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Efficiency and Ticket Scalping

Demand The Market for Super Bowl Tickets ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 EXHIBIT 4.26 Quantity of Super Bowl Tickets Price per Ticket 0 Supply QSQS QDQD PEPE P1P1 Shortage