1. AP Test Section I (67% of Grade) 60 questions in 70 minutes 10 Minute Break Section II (33%) (50, 25, 25) Three free-Response Questions in 60 minutes.

2. AP Microeconomics Exam I.Basic Economic Concepts (8-14%) A.Scarcity, Choice, Opportunity Cost B.PPC C.Comparative Advantage, Absolute Advantage, specialization, and trade D.Economic Systems E.Property Rights and the Role of Incentives F.Marginal Analysis II.Supply and Demand (15-20%)

3. Elasticity 04 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

4. Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity LO1 4-4

5. Price Elasticity of Demand Formula Formula for price elasticity of demand E d = LO1 Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X 4-5

6. Practice problem The price of a large polish candy bar is reduced from $2.00 to $1.50. In reaction, consumers decrease their purchases from 100 to 200. Using the above formula, what is the price elasticity Coefficient of Demand for polish candy bars? Try it the other way.

7. Price Elasticity of Demand Formula Use the midpoint formula Ensures consistent results Change in quantity Change in price Sum of quantities/2 Sum of prices/2 LO1 E d = ÷ 4-7

8. Price Elasticity of Demand Formula Use percentages Unit free measure Compare responsiveness across products Eliminate the minus sign Easier to compare elasticities LO1 4-8

9. Interpretation of Elasticity of Demand E d > 1 demand is elastic E d = 1 demand is unit elastic E d < 1 demand is inelastic Extreme cases Perfectly inelastic Perfectly elastic LO1 4-9

10. Using Midpoint formula for E d Determine the price elasticity a)When the price changes from $5 to $4 b)When the price changes from $4 to $3

11. Answer From $5 to $4 From $4 to $3

12. Extreme Cases LO1 D1D1 P Perfectly I nelastic demand Perfectly inelastic demand (Ed = 0) 0 4-12

13. Extreme Cases LO1 Perfectly E lastic demand P D2D2 Perfectly elastic demand (Ed = ∞) 0 4-13

14. Total Revenue Test Total Revenue = Price X Quantity Inelastic demand P and TR move in the same direction Elastic demand P and TR move in opposite directions LO2 4-14

15. Total Revenue Test LO2 $3 2 1 0 10 20 30 40 Q P a b D1D1 Lower price and elastic demand Blue gain exceeds orange loss 4-15

16. Total Revenue Test LO2 $4 3 2 1 0 10 20 Q P c d D2D2 Lower price and inelastic demand Orange loss exceeds blue gain 4-16

17. Total Revenue Test LO2 $3 2 1 0 10 20 30 Q P e f D3D3 Lower price and unit elastic demand Blue gain equals orange loss 4-17

18. Total Revenue Test LO2 Price Elasticity of Demand for Movie Tickets as Measured by the Elasticity Coefficient and the Total-Revenue Test (1) Total Quantity of Tickets Demanded per Week, Thousands (2) Price per Ticket (3) Elasticity Coefficient (E d ) (4) Total Revenue (1) X (2) (5) Total Revenue Test 1$8$8,000 275.0014,000Elastic 362.6018,000Elastic 451.5720,000Elastic 541.0020,000Unit Elastic 630.6418,000Inelastic 720.3814,000Inelastic 810.20 8,000Inelastic 4-18

19. Elasticity and Total Revenue LO2 012345678 012345678 Quantity Demanded Price Total Revenue (Thousands of Dollars) $20 18 16 14 12 10 8 6 4 2 $8 7 6 5 4 3 2 1 a b c d e f g h Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1 D TR 4-19

20. Summary of Price Elasticity of Demand LO2 Price Elasticity of Demand: A Summary Absolute Value of Elasticity CoefficientDemand Is:Description Impact on Total Revenue of a: Price IncreasePrice Decrease Greater than 1 (E d > 1) Elastic or relatively elastic Q d changes by a larger percentage than does price Total Revenue decreases Total Revenue increases Equal to 1 (E d = 1) Unit or unitary elastic Q d changes by the same percentage as does price Total revenue is unchanged Total revenue is unchanged Less than 1 (E d < 1) Inelastic or relatively inelastic Q d changes by a smaller percentage than does price Total revenue increases Total revenue decreases 4-20

21. Determinants of Elasticity of Demand Substitutability More substitutes, demand is more elastic Examples? Depends on how defined. Proportion of Income Higher proportion of income, demand is more elastic. Examples? Luxuries vs. Necessities Luxury goods, demand is more elastic. Examples? Time More time available, demand is more elastic LO1 4-21

22. Price Elasticity of Demand LO1 Selected Price Elasticities of Demand Product or Service Price Elasticity of Demand (E d )Product or Service Price Elasticity of Demand (E d ) Newspapers.10Milk.63 Electricity (household).13Household appliances.63 Bread.15Liquor.70 MLB Tickets.23Movies.87 Telephone Service.26Beer.90 Cigarettes.25Shoes.91 Sugar.30Motor vehicles1.14 Medical Care.31Beef1.27 Eggs.32China, glassware1.54 Legal Services.37Residential land1.60 Automobile repair.40Restaurant meals2.27 Clothing.49Lamb and mutton2.65 Gasoline.60Fresh peas2.83 4-22

23. Agenda Through October 15 th October 1 st – Finish up Chapter 4 (Case Study) October 2 nd - Quiz - Chapter 4 October 3,4 th Parts of Chapter October 5 th – NO OHS (Computer Lab) October 8 th - No School October 9 th – Finish up 37 October 10 th – Quiz – Chapter 37 October 11 th – Review October 12 th – No OHS (Computer Lab) Monday October 15 th - First Major Test. 100 Points.

24. Real World GROUP. Mr. Politico. Impose Taxes on Alcohol and Tobacco. Not to raise revenue but to curb demand. What is likely to happen. Discuss? GROUP. Ms. Politico doesn’t like that she bought a airline ticket for $762 while the family next to her purchased their seats for $290 each. She wants to pass a law to TREAT ALL PASSENGERS EQUALLY. Who can argue with that? Please discuss. INDIVIDUAL. Mr. Politico wants to decriminalize marijuana and place a tax on the sale. Applying what you know about elasticity and supply and demand. Please graph and discuss likely outcome. 10 Minutes. 20 HW Points.

25. Price Elasticity of Supply Measures sellers’ responsiveness to price changes Elastic supply, producers are responsive to price changes Inelastic supply, producers are not responsive to price changes LO3 4-25

26. Price Elasticity of Supply Formula to compute elasticity E s > 1 supply is elastic E s < 1 supply is inelastic LO3 Percentage Change in Quantity Supplied of Product X Percentage Change in Price of Product X E s = 4-26

27. The Essential Question How easily can the producers shift resources between alternate uses? The easier – the more elastic.

28. Price Elasticity of Supply Time is primary determinant of elasticity of supply Time periods considered Market period Short Run Long Run LO3 4-28

29. Elasticity of Supply: The Market Period LO3 P Q Perfectly inelastic supply D1D1 D2D2 SmSm Q0Q0 PmPm P0P0 4-29 Immediately – Too soon for producers to change quantity supplied.

30. Elasticity of Supply: The Short Run LO3 Supply is more elastic than in market period P Q D1D1 D2D2 SsSs Q0Q0 PsPs P0P0 QsQs 4-30 Too short to change plant capacity but long enough to use fixed plant size more or less intensively.

31. Elasticity of Supply: The Long Run LO3 Supply is even more elastic than in the short run P Q D1D1 D2D2 SlSl Q0Q0 PlPl P0P0 QlQl 4-31 New Firms Adjust Plant Size

32. Applications of Elasticity of Supply Antiques Inelastic supply Reproductions More elastic supply Volatile gold prices Inelastic supply LO3 4-32

33. Cross Elasticity of Demand Measures responsiveness of sales to change in the price of another good Substitutes – positive sign Complements – negative sign Independent goods - zero LO4 Percentage change in quantity demanded of product X E x,y = Percentage change in price of product Y 4-33

34. Cross Elasticity of Demand Change the price? If we change the price of our product A how will that effect the sales of our product B? Allow a merger? Higher the cross elasticity and market share the less likely it will be approved. LO4 4-34

35. Income Elasticity of Demand Measures responsiveness of buyers to changes in income Normal goods – positive sign Inferior goods – negative sign LO4 Percentage change in quantity demanded E i = Percentage change in income 4-35

36. Income Elasticity Insights High income elasticities Most affected by a recession Low or negative income Least affected by a recession LO4 4-36

37. E x,y and E i LO4 Cross and Income Elasticities of Demand Value of CoefficientDescriptionType of Good(s) Cross elasticity: Positive (E wz > 0) Negative (E xy < 0) Quantity demanded of W changes in same direction as change in price of Z Quantity demanded of X changes in opposite direction from change in price of Y Substitutes Complements Income elasticity: Positive (E i >0) Negative (E i <0) Quantity demanded of the product changes in same direction as change in income Quantity demanded of the product changes in opposite direction from change in income Normal or superior Inferior 4-37