Economics (Fall 2016) UNIT 2: Supply and Demand

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1 1 Economics (Fall 216) UNIT 2: Supply and Demand Name: Period: Teacher: Mrs. Povletich

2 2

3 3 Demand Economics Chapter 4 Outline Once we have taken notes on a section you are responsible for completing the review questions and Applying the Principles after. Use your textbook if you need additional support. Section 1: Understanding Demand I. What Is Demand? A. Markets are where people come together to buy and sell goods and services. 1. is the buying side of a market. 2. is the selling side of a market. B. refers to the willingness and ability of buyers to purchase a good or service. C. is different from demand. Quantity demanded is the number of units of a good purchased at a specific price. Quantity demanded is always a. II. III. What Does the Law of Demand Say? A. The law of demand says that as the price of a good, quantity demanded of the good, and as price of a good decreases, quantity demanded of the good increases. B. Quantity refers to the number of units of a good purchased at a specific price. Why Do and Quantity Demanded Move in Opposite Directions? A. and quantity demanded move in opposite directions because of the law of utility. B. The law of diminishing marginal utility states that as a person consumes additional units of a good, the utility gained from each additional unit of the good. o Diminishing means decreasing o o Marginal means additional Utility means satisfaction IV. The Law of Demand in Numbers and Pictures A. A demand is a numerical chart showing the law of demand. B. A demand curve is a (n) representation of the law of demand. V. The Law of Demand in Numbers and Pictures A. A (n) demand curve represents an individual s demand. B. A (n) demand curve is the sum of all individual demand curves added together.

4 4 Review Questions (complete this on your own) Use the terms demand and quantity demanded correctly in a sentence about concert tickets. Yesterday the price of a good was $1, and the quantity demanded was 1 units. Today the price of the good is $12, and the quantity demanded is 87 units. Did quantity demanded fall because the price increased, or did the price rise because quantity demanded fell? Explain. What does the law of diminishing marginal utility have to do with demand? Assume that the law of demand applies to criminal activity. What might community leaders do to reduce the number of crimes committed in the community? Chapter 4, Section 1 Applying the Principles The Law of Demand 1. The two conditions of demand are and to purchase. 2. The law of demand says that as the price of a good increases, the quantity demanded of the good. 3. The law of demand says that as the price of a good decreases, the quantity demanded of the good. 4. According to the law of demand, price and quantity demanded move in directions. Demand Schedules and Demand Curves The law of demand can be represented in numbers using a demand or it can be represented as a graph showing a demand. Question #5 illustrates the connections between a demand schedule and a demand curve. 5. Use the demand schedule to create a demand curve for Simon's consumption of music downloads on the grid shown. Label the curve D 1. DEMAND SCHEDULE FOR SIMON Quantity Demanded $7 1 $6 2 $5 3 $4 4 $3 5 $2 6 $1 7 $1 $9 $8 $7 $6 $5 $4 $3 $2 $ Quantity Demanded

5 5 Use the graph in question 5 to answer questions The demand curve shows that at a price of $7, Simon will buy music download(s), and at a price of $1, he will buy music download(s). 7. Simon's buying behavior demonstrates the law of. 8. Simon's change in buying behavior at different prices is a change in. 9. Simon is not willing to pay $7 for every download because his utility (satisfaction) decreases as he downloads more and more music. Economists call this concept the law of. 1. How does the concept in question 9 explain the slope of the demand curve? All people do not have the same demand for a good. Some people have a greater willingness and ability to purchase a good than other people do. 11. Use the demand schedule below to create a demand curve for Carla's consumptions of music downloads. Draw the graph on the grid in question 5. Label the curve D2. DEMAND SCHEDULE FOR CARLA Quantity Demanded $7 4 $6 5 $5 6 $4 7 $3 8 $2 9 $1 1 To answer questions 12-16, use the graph in question 5, which now shows both Simon's and Carla's demand curves. 12. Carla's demand curve (D 2 ) is to the (right or left) of Simon's demand curve (D 1 ). 13. For each of the listed prices, Carla is willing and able to buy (more or less) music downloads than Simon is willing and able to buy. 14. At each of the possible quantities, Carla is willing and able to pay a (higher or lower) price than Simon is willing and able to pay. 15. The demand curves you created on the grid in question 5 are (individual or market) demand curves. 16. Suppose Simon and Carla are the only buyers of music downloads. How would you create a market demand curve from the demand curves you drew on the grid in question 5?

6 6 17. Fill in the market demand schedule for Simon and Carla's music downloads in the space below and then graph the market demand curve. DEMAND SCHEDULE FOR MUSIC DOWNLOADS Quantity Demanded $7 $6 $5 $4 $3 $2 $1 $1 $9 $8 $7 $6 $5 $4 $3 $2 $ Quantity Demanded ****************************************************************************************** Section 2: The Demand Curve Shifts I. When Demand Changes, the Curve Shifts A. A rightward shift means that demand has. B. A leftward shift means that demand has. II. III. What Factors cause Demand Curves to Shift? A. Income 1. A good for which demand rises as income rises and falls as income falls is a (n). 2. A good for which demand falls as income rises and rises as income falls is a (n) good. 3. If a person buys the same amount of a good when income changes, the good is a neutral good. B. 1. People s affect how much of a good they buy. C. s of Related Goods 1. With, the demand for one good moves in the same direction as the price of the other good. 2. With, the demand for one good moves in the opposite direction as the price of the other. D. Number of E. 1. Buyers who expect the price of a good to be in the future may buy the good now. In this case, current demand for the good. 2. Buyers who expect the price of a good to be in the future may wait and buy the good later. In this case, current demand for the good. What Factor Causes a Change in Quantity Demanded? A. A change in quantity demanded refers to a movement a demand curve. B. Only the of the good can directly cause a change in the.

7 7 Review Questions (complete this on your own) Explain what it means if demand increases. Identify a good that is a substitute for one good and a complement for another. (Hint: A Coca-Cola may be a substitute for a Pepsi but a complement for a hamburger.) In recent years the price of a computer has fallen. What effect is this price change likely to have on the demand for software? Explain your answer. Changes in Demand and Shifts in Demand Curves When demand changes, the demand curve shifts... Chapter 4, Section 2 Applying the Principles 18. If demand increases, the demand curve shifts to the (right or left), meaning the buyers want to buy (more or less) of a good at each and every price. 19. If demand decreases, the demand curve shifts to the (right or left), meaning the buyers want to buy (more or less) of a good at each and every price. Factors the Cause Shifts in Demand Curves Listed below are the five factors that cause demand curves to shift. For each factor, fill in the blanks to describe how the factor affects the demand for a good. Factor: INCOME 2. As income rises, demand for (normal or inferior) goods rises while demand for (normal or inferior) goods falls. As income falls, demand for normal goods (rises or falls) while demand for inferior goods (rises or falls). Factor: PREFERENCES 21. Increased preference for a good (increases for decreases) demand; decreased preference for a good (increases or decreases) demand. Factor: PRICES OF RELATED GOODS 22. If two goods are (substitutes or complements) and the price of one good rises, the demand for the other good rises. If two goods are (substitutes or complements) and the price of one good rises, the demand for the other good falls. 23. If two goods are (substitutes or complements) and the price of one good falls, the demand for the other good rises. If two goods are (substitutes or complements) and the price of one good falls, the demand for the other good falls.

8 8 Factor: NUMBER OF BUYERS 24. The more buyers in a particular market area, the (higher or lower) the demand; the fewer buyers, the (higher or lower) the demand. Factor: FUTURE PRICE 25. If buyers expect prices to rise in the future, they will buy (now or later). If buyers expect prices to fall in the future, they will buy (now or later). Demand vs. Quantity Demanded 26. What will cause a change in the demand for a good? 27. What will cause a change in the quantity demanded of a good? 28. How is a change in demand represented on a graph? 29. How is a change in quantity demanded represented on a graph? Changes in Demand and in Quantity Demanded In the following questions, fill in the blanks to describe how each event will affect the demand for large sport utility vehicles (SUVs). 3. The price of gasoline hits $4 a gallon. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (income, preferences, price of related goods complements, price of related goods substitutes, number of buyers, future price or a change in price). 31. Smaller, sportier crossover vehicles hit the market and become the latest craze. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (income, preferences, price of related goods complements, price of related goods substitutes, number of buyers, future price or a change in price). 32. Rising steel prices cause the prices of SUVs to rise. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (income, preferences, price of related goods complements, price of related goods substitutes, number of buyers, future price or a change in price). 33. Government data shows that the incomes of Americans are expected to rise faster than ever over the next year. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (income, preferences, price of related goods complements, price of related goods substitutes, number of buyers, future price or a change in price).

9 9 34. Word leaks to consumers that General Motors and Ford plan to offer big rebates on SUVs next month. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (income, preferences, price of related goods complements, price of related goods substitutes, number of buyers, future price or a change in price). 35. The government loosens immigration laws, allowing millions of immigrants into the country. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (income, preferences, price of related goods complements, price of related goods substitutes, number of buyers, future price or a change in price). The Relationship between Income and Demand As a result of an increase in wages from his employer, Joe increased his consumption of Junior Mints and mangos, decreased his consumption of fried chicken, and maintained the same consumption of yogurt. Identify each of the goods consumed by Kramer as a normal good, an inferior good, or a neutral good. Then write the letter of the graph that represents the change to Joe s demand curve for each of the goods. 36. Junior Mints: 37. Graph 38. Mangos: 39. Graph 4. Fried Chicken: 41. Graph 42. Yogurt: 43. Graph D 1 D 2 D 2 D 1 D 1 Quantity Demanded A Quantity Demanded B Quantity Demanded C ************************************************************************************************************ Section 3: Elasticity of Demand II. What is Elasticity of Demand A. Elasticity is another term in economics that sounds more difficult to understand than it really is. It measures how a price affects the of a particular good that people want to buy. B. Demand for a good can be elastic, inelastic, or unit-elastic. means that a price change has a impact on the quantity demanded. means that there is a change in quantity demanded when the price changes. And means that the impact of a price change is that is, neither major nor minor.

10 1 Elasticity of Demand = Percentage change in quantity demanded Percentage change in price How do we find out which type of demand is at work? In all cases, the type of demand has to do with the between the percentage change in quantity demanded and the percentage change in price. When we divide the percentage change in quantity demanded by the percentage change in price, we get a that is greater than 1, less than 1, or exactly 1. If the answer to our division problem is greater than 1, the demand is ; if the answer is less than 1, the demand is ; if the answer is exactly 1, the demand is. III. IV. What Determines Elasticity of Demand? 1. Number of substitutes. When there are substitutes for a good, the quantity demanded is unlikely to change much if the price rises. Therefore, the demand for the good is likely to be. When there are many substitutes for a good, the opposite is true: the demand tends to be elastic. 2. Luxuries versus necessities. Demand for tends to be because people need those goods even if prices rise. Demand for tends to be because people will often do without those goods if prices rise. 3. Percentage of income spent on the good. If a good requires a percentage of a person s income, demand for it tends to be. Demand for goods that require a percentage of a person s income tends to be. 4. Time. When consumers have little time to to a price change, demand is usually inelastic. When they have more time to respond, demand is usually elastic. An Important Relationship Between Elasticity and Total Revenue B. Elastic demand and an increase in price lead to a in total revenue. B. Elastic demand and a decrease in price lead to an in total revenue. C. Inelastic demand and an increase in price lead to an in total revenue. D. Inelastic demand and a decrease in price lead to a in total revenue. Review Questions (complete this on your own) Does an increase in price necessarily bring about a higher total revenue? Explain. The price of a good rises from $4 to $4.5, and as a result, total revenue falls from $4 to $35. Is the demand for the good elastic, inelastic, or unit-elastic? Good A has 1 substitutes, and good B has 2 substitutes. The demand is more likely to be elastic for which good? Explain your answer.

11 11 Chapter 4, Section 3 Applying the Principles Elasticity Versus Inelasticity According to the law of demand, when price rises, quantity demanded falls and when price falls, quantity demanded rises. Elasticity of demand is a measure of how much the quantity demanded of a good rises or falls due to a change in the price of the good. You can think of elastic demand as being like an elastic band - the quantity demanded of the good will stretch freely when pulled by a change in the good's price. Inelastic demand is more like a rope - the quantity demanded of the good will not stretch easily when pulled by a change in the good's price. 44. If the price of a good with elastic demand increases, which of the following describes the effect on the quantity demanded of the good? A. increases a little B. increases a lot C. decreases a little D. decreases a lot 45. If the price of a good with inelastic demand increases, which of the following describes the effect on the quantity demanded of the good? A. increases a little B. increases a lot C. decreases a little D. decreases a lot In questions 46-49, the four factors that determine the elasticity of demand are listed. For each factor, fill in the blanks to describe how the factor affects the elasticity of demand for a good. 46. Factor: Number of Substitutes Description: More available substitutes tend to make demand for a good (elastic or inelastic); fewer available substitutes tend to make demand for a good (elastic or inelastic). 47. Factor: Luxuries versus Necessities Description: The demand for (luxuries or necessities) tends to be elastic; the demand for (luxuries or necessities) tends to be inelastic. 48. Factor: Percentage of Income Spent on the Good Description: The demand for goods that take a large (large or small) percentage of income tends to be elastic; the demand for goods that take a relatively (large or small) percentage of tends to be inelastic. 49. Factor: Time Description: The less time you have to respond to a price change in a good, the more likely it is that your demand is going to be (elastic or inelastic). Considering the factors you listed in questions 46-49, identify the demand for the goods in questions 5-52 as elastic, inelastic, or unit-elastic. Explain the reason for each choice. 5. T-Bone Steak: Demand for a T-bone steak would most likely be because there are available, it is a good, and it takes a relatively portion of income. 51. New Sport Utility Vehicle: Demand for a new SUV would most likely be because there are available, it is a good, and it takes a relatively portion of income.

12 Insulin: Demand for insulin would be because there are no and it is an absolute for a diabetic regardless of the percentage of income spent. In each of the cases described in questions 53-55, identify whether the demand for the good is elastic, inelastic, or unit-elastic. Write your answers on the lines provided. 53. The price of corn rises 5%, and the quantity demanded falls 15%. 54. The price of bagels rises 8%, and the quantity demanded falls 8%. 55. The price of telephones rises 1%, and the quantity demanded falls 2%. Elasticity and Total Revenue Elasticity of demand matters to sellers of goods because it relates to their total revenue ( x Quantity sold = Total revenue). Questions relate to how the elasticity of demand for a good affects a seller's total revenue when the seller changes the price of the good. Fill in each blank with the correct answer. 56. If demand for a good is elastic and price increases, then total revenue will (increase, decrease or stay the same). 57. If demand for a good is elastic and price decreases, then total revenue will (increase, decrease or stay the same). 58. If demand for a good is inelastic and price increases, then total revenue will (increase, decrease or stay the same). 59. If demand for a good is inelastic and price decreases, then total revenue will (increase, decrease or stay the same). 6. If demand for a good is unit-elastic and price increases, then total revenue will (increase, decrease or stay the same). 61. If demand for a good is unit-elastic and price decreases, then total revenue will (increase, decrease or stay the same). 62. If a seller would like to increase revenue, the seller should (a) increase the price of the good if the demand for the good is (elastic or inelastic) or (b) decrease the price of the good if the demand for the good is (elastic or inelastic). In each of questions 63-65, complete the table to calculate the total revenue for the good. Then fill in the blanks in the question following the table to summarize the results in each case. 63. When Edith increased the price of a good from $2 to $3, the quantity demanded rose from 1 to 11. X Quantity sold = Total revenue Original $ $ New $ $ So, because revenue (rose or fell) when the price (rose or fell), demand for the good must be (elastic or inelastic). 64. When Renaldo increased the price from $1 to $12, the quantity demanded fell from 8 to 4. X Quantity sold = Total revenue Original $ $ New $ $ So, because revenue (rose or fell) when the price (rose or fell), demand for the good must be (elastic or inelastic).

13 When Keiko decreased the price from $15 to $125, the quantity demanded rose from 6 to 12. X Quantity sold = Total revenue Original $ $ New $ $ So, because revenue (rose or fell) when the price (rose or fell), demand for the good must be (elastic or inelastic). Elasticity of Demand and a Cigarette User Fee To increase state revenue and decrease smoking rates, the governor of Minnesota proposed that the state impose a $.75 per pack cigarette user fee. His proposal was passed by the state legislature. Use this information and your knowledge about elasticity of demand to answer questions Did the governor of Minnesota assume that demand for cigarettes was elastic or inelastic when he made his proposal? The governor assumed that demand for cigarettes was (elastic or inelastic) because one of his goals was to decrease smoking rate. If you raise the price of a good with this type of demand, the quantity demanded will go (up or down). 67. Given the large increase in price, in which income groups and age groups would you expect to see the greatest decrease in quantity demanded? People with (larger or smaller) incomes likely will be affected because the relative percentage of their income spent on cigarettes will be greater. Also people who smoke occasionally but are not addicted to nicotine likely will be affected because they may view cigarettes as a (luxury or necessity) instead of a (luxury or necessity). 68. Which of the four factors that determine elasticity of demand do you think plays the largest role in people's demand for cigarettes? 69. How might time affect this scenario? Elasticity of Demand and Gas s Many people once believed that an increase in the price of gasoline would change consumer attitudes and driving behavior. For instance, economists assumed that people would drive less often and buy smaller, more efficient cars as the price of gasoline increased. However, gas prices increased in 25 and 28, and while the sales of sport utility vehicles suffered, people's driving habits and gas consumption levels changed very little. Use this information and your knowledge about elasticity of demand to answer questions Is the demand for gasoline more elastic or more inelastic than previously thought? Explain your answer. The demand for gasoline seems to be more (elastic or inelastic) than previously thought. If you raise the price of this type of good, the quantity demanded will (increase or decrease) only a little. 71. Which two of the four factors that determine elasticity of demand do you think plays the largest role in people's buying habits for gasoline? How might time affect this scenario?

14 14 Elasticity of Demand in Graphs In questions 73-75, use your understanding of elasticity of demand to decide whether the graph shows a good with elastic demand or a good with inelastic demand or a good with unit-elastic demand D D D Quantity Demanded Quantity Demanded Quantity Demanded

15 15 Supply Chapter 5 Section 1 VI. VII. VIII. IX. What Is Supply? A. Supply refers to the willingness and of sellers to produce and offer to sell as a good. What Does the Law of Supply Say? A. The law of supply says that as the price of a good, the quantity supplied of the good, and as price of a good decreases, the quantity supplied of the good decreases. B. and quantity supplied move in the same direction, or have a(n) relationship. C. Quantity refers to the number of units of a good produced and offered for sale at a specific price. The Law of Supply in Numbers and Pictures A. A supply is a numerical chart showing the law of supply. B. A supply is a graphical representation of the law of supply. A Vertical Supply Curve A. The law of supply does not hold for goods that can no longer be produced. The supply curve for this type of good is. B. What two examples did the book use to explain this concept? C. The does not hold when there is no time to produce more of a good. The supply curve for this type of good is vertical. X. A Firm s Supply Curve and a Market Supply Curve A. A(n) supply curve is the supply curve for a particular firm. B. A(n) supply curve is the sum of all firm s supply curves. Review Questions (complete this on your own) Identify a good that has an upward-sloping supply curve and identify a good that has a vertical supply curve. (Do not use the examples from the book, come up with your own) Three months ago the price of a good was $4, and the quantity supplied was 2 units. Today the price is $6, and the quantity supplied is 4 units. Did the quantity supplied rise because the price increased, or did the price rise because the quantity supplied increased (Which is the cause and which is the effect)? Suppose three McDonald s restaurants operate in your town, and each pays its employees $6 per hour. If McDonald s started paying $9 per hour to its employees, would more, fewer or the same number of people want to work for McDonald s, according to the law of supply? Explain your answer in economic terms.

16 16 Applying the Principles Chapter 5, Section The two conditions of supply are and to produce and sell. 77. The law of supply says that as the price of a good increases, the quantity supplied of the good. 78. The law of supply says that as the price of a good decreases, the quantity supplied of the good. 79. According to the law of supply, price and quantity supplied move in the direction. Supply Schedules and Supply Curves The law of supply can be represented in numbers using a supply schedule or it can be represented as a graph showing a supply curve. Answer question 8 to illustrate the connection between a supply schedule and a supply curve. 8. Simon, an enthusiastic consumer of music downloads, has taken a keen interest in the industry. He has started his own company, Simon, Inc., which manufactures premium mp3 players. Use the supply schedule below to create a supply curve for Simon's company on the grid shown. Label the curve S 1. SUPPLY SCHEDULE FOR SIMON, INC. ($) Quantity Supplied (units) $1 2 $2 3 $3 4 $4 5 $5 6 $6 7 $7 8 Use the graph you created in question 8 to answer questions The supply curve shows that at a price of $3, Simon, Inc., will offer to sell premium mp3 players, and at a price of $6, the company will offer to sell premium mp3 players. 82. The company s selling behavior demonstrates the law of. 83. The change in production of Simon, Inc., at different prices is a change in. All producers do not supply the same amount of a good. Some are willing and able to supply greater quantities than others are.

17 Use the information in question 84 to compare the supply curves of two different companies for the same good. 84. Use the supply schedule below to create a supply curve for premium mp3 players for Carla, Inc. Draw the graph on the grid in question 8. Label the curve S 2. SUPPLY SCHEDULE FOR CARLA, INC. ($) Quantity supplied (units) $1 4 $2 5 $3 6 $4 7 $5 8 $6 9 $7 1, To answer questions 85-89, use the graph in question 8, which now shows the supply curves for both Simon, Inc., and Carla, Inc. 85. The supply curve for Carla, Inc., (S 2 ) is to the of the supply curve for Simon, Inc., (S1). 86. For each of the listed prices, Carla, Inc., is willing and able to produce premium mp3 players than Simon, Inc., is willing and able to produce. 87. At each of the possible quantities, Carla, Inc., is willing to accept a price than Simon, Inc., is willing to accept. 88. The supply curves you created on the grid in question 8 are supply curves. 89. Suppose Simon, Inc., and Carla, Inc., are the only suppliers of premium mp3 players. How would you create a market supply curve from the supply curves you drew on the grid in question 8? Vertical Supply Curves As shown in the figure to the right, a supply curve is vertical when the quantity supplied cannot increase regardless of the price. For instance, the number of tickets available for this season's Super Bowl is finite because the stadium has a fixed number of seats. A vertical supply curve illustrates that at any price, the quantity supplied remains the same List three other goods that would have vertical supply curves. S 1 Quantity Supplied ******************************************************************************************

18 18 Section 2 IV. When Supply Changes, the Curve Shifts A. A rightward shift means that supply has. B. A leftward shift means that supply has. V. What Factors Cause Demand Curves to Shift? A. Resource s 1. A decrease in a resource price increases supply. The supply curve shifts to the. 2. An increase in a resource price decreases supply. The supply curve shifts to the. B. Technology 1. is the body of skills and knowledge concerning the use of resources in production. 2. The ability to produce more output with a fixed amount of resources is a(n). 3. is the average cost of a good. 4. An advancement in technology increases supply. The supply curve shifts to the right. C. Taxes 1. An increase in decreases supply. The supply curve shifts to the left. 2. If a tax is, the supply curve will shift back to the right. D. Subsidies 1. An increase in increases supply. The supply curve shifts to the right. 2. If a subsidy is, the supply curve will shift back to the left. E. Quotas 1. A legal limit on the number of units of a foreign-produced good (or import) that can enter a country is a(n). 2. A quota supply. The supply curve shifts to the left. 3. If a(n) is eliminated, the supply curve will shift back to the right. F. Number of Sellers 1. An increase in the number of sellers increases supply, and the supply curve shifts to the right. 2. A decrease in the number of sellers decreases supply, and the supply curve shifts to the left. G. Future 1. It is difficult for producers to keep their goods out of the market and wait for prices to rise if the goods are (eggs, fruits, vegetables, etc.) because they will go bad, or spoil, before the price increase. H. Weather (in some cases) 1. Bad weather may decrease the supply of some products. Unusually good weather can increase supply. 2. Bad weather, such as hurricanes, can also affect the supply of products. VI. VII. What Factor Causes a Change in Quantity Supplied? A. The only factor that can cause a change in the quantity supplied of a good is a change in the of the good. B. A change in supplied is shown as a movement along a given supply curve. Elasticity of Supply A. Elasticity of supply is the relationship between the percentage change in quantity supplied and the percentage change in. 1. supply exists when the percentage change in quantity supplied (the numerator) is greater than the percentage change in price (the denominator). 2. supply exists when the percentage change in quantity supplied (the numerator) is less than the percentage change in price (the denominator). 3. supply exists when the percentage change in quantity supplied (the numerator) is the same as the percentage change in price (the denominator).

19 19 Review Questions (complete this on your own) Identify what happens to a given supply curve as a result of each of the following Resources prices fall: In each of the following cases, identify whether the supply of the good is elastic, inelastic, or unit-elastic The price of books increases from 1% and the quantity supplied of books increases 14% What factor(s) cause(s) movement along a supply curve? Technology advances: A quota is repealed: The price of bread increases 2% and the quantity supplied of bread increases 2%. A tax on the production of a good is repealed: The price of telephones decrease 6% and the quantity supplied of telephones decreases 8%. Applying the Principles Chapter 5, Section If supply increases, the supply curve shifts (right or left), meaning that sellers want to sell (more or less) of a good at each and every price. 92. If supply decreases, the supply curve shifts (right or left), meaning that sellers want to sell (more or less) of a good at each and every price. In questions 93-1, the factors that cause supply curves to shift are listed. For each factor, fill in the blanks to describe how the factor affects the supply of a good (whether the factor causes supply to rise or to fall). 93. Factor: Resource s Description: If resources prices fall, supply (rises of falls) and the supply curve shifts to the (right or left). If resources prices rise, supply (rises or falls) and the supply curve shifts to the (right or left). 94. Factor: Technology Description: Advancements in technology reduce per-unit costs. Supply (rises or falls) and the supply curve shifts to the (right or left). 95. Factor: Taxes Description: Higher taxes make production more expensive so supply (rises or falls) and the supply curve shifts to the (right or left). Lower taxes shift the supply curve to the (right or left).

20 96. Factor: Subsidies Description: Subsidies make production less expensive so supply (rises or falls) and the supply curve shifts to the (right or left). If a subsidy is removed, the supply curve shifts to the (right or left). 97. Factor: Quotas Description: Quotas (increase or decrease) supply and shift the supply curve to the (right or left). If a quota is eliminated, the supply curve shifts to the (right or left). 98. Factor: Number of Sellers Description: If the number of sellers increases, supply (rises of falls) and the supply curve shifts to the (right or left). If the number of sellers decrease, supply (rises or falls) and the supply curve shifts to the (right or left). 99. Factor: Future Description: If sellers expect the price of a good to rise in the future, they may withhold the good from the market and wait to get the higher price. In this case, supply (rises or falls) and the supply curve shifts to the (right or left). If sellers expect the price of a good to fall in the future, they may supply more of the good now to get the higher price. In this case, supply (rises or falls) and the supply curve shifts to the (right or left). 1. Factor: Weather Description: Bad weather can reduce the supply of agricultural goods and the supply curve shifts to the (right or left). Good weather can increase the supply of agricultural goods and the supply curve shifts to the (right or left). Supply is not the same as quantity supplied. Answer questions on the lines provided. 11. What will cause a change in the supply of a good? What will cause a change in the quantity supplied of a good? 13. How is a change in supply represented on a graph? 14. How is a change in quantity supplied represented on a graph? In questions , fill in the blanks to describe how each event will affect the country's total supply of corn and then graph the result. 15. The U.S. government increases the subsidy for corn production. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? S1 Quantity Supplied

21 A major drought destroys crops in America's heartland. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? S1 17. The price of fuel used in farm machinery increases to a new high. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? Quantity Supplied S1 18. The U.S. government places a quota on all imported farm products. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? 19. A newly developed seed increases the corn yield. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? Quantity Supplied S1 Quantity Supplied S1 11. As property values rise, many farm fields are turned into housing developments and shopping malls. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? 111. The U.S. government gives farmers a tax cut by allowing them to deduct most expenses. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? Quantity Supplied S1 Quantity Supplied S1 Quantity Supplied 112. Corn prices are expected to rise next month as more ethanol refineries start production. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? S1 Quantity Supplied

22 Chocolate-covered corn on a stick becomes a new fad at state fairs. Will the supply of corn increase, decrease, or stay the same? In which direction will the supply curve shift? Which of the eight factors causes the shift? S1 Quantity Supplied ************************************************************************************************************ Elasticity of Supply (Section 3) Elasticity of supply is a measure of how much the quantity supplied of a good rises or falls owing to a change in the price of the good When quantity supplied changes by a larger percentage than price, supply is When quantity supplied changes by a smaller percentage than price, supply is When quantity supplied changes by the same percentage as price, supply is. Elasticity Versus Inelasticity In each of the cases described in questions 48-5, identify whether the supply of the good is elastic, inelastic, or unit-elastic. ELASTICITY = % Change in Quantity Supplied % Change in 117. The price of textbooks increases by 2 percent, and the quantity supplied of textbooks rises 2 percent The price of jeans increases by 5 percent, and the quantity supplied of jeans increases by 3 percent The price of televisions increases by 15 percent, and the quantity supplied of televisions increases by 25 percent. In questions 12 and 121, use your understanding of elasticity of supply to decide whether the graph shows a good with elastic supply or a good with inelastic supply. S1 S1 Quantity Supplied Quantity Supplied

23 23 : Supply and Demand Together Chapter 6 Moving to Equilibrium Supply and demand work together to determine price. For example, they work together to determine the price of corn at an auction (see example on the presentation). A occurs when the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices the equilibrium price. s fall when a surplus occurs, because suppliers hope to sell their, or the excess stock of goods that they have on hand. A occurs when the quantity demanded of a good is greater than the quantity supplied. Shortages occur only at prices equilibrium price. A shortage is the opposite of a surplus. s when there is a shortage. Buyers will offer to pay a higher price to get sellers to sell to them rather than to other buyers. A market is considered to be in when the quantity of a good that buyers are willing and able to buy is to the quantity that sellers are willing and able to produce and offer for sale. When a market reaches equilibrium, quantity demanded equals quantity supplied. The equilibrium is the amount of a good that is bought and sold in a market that is in equilibrium. The equilibrium is the price at which a good is bought and sold in a market that is in equilibrium. What Causes Equilibrium s to Change? Either supply or demand must change in order for the equilibrium price to change. can cause changes to the equilibrium price. If there is greater demand for a particular good, buyers are willing to pay a higher price to obtain that good. can also cause changes to the equilibrium price. If the supply for a particular good exceeds the demand a surplus exists the price will decrease until it reaches an equilibrium price. Changes in Supply and in Demand at the Same Time So far, we have looked at situations where either supply or demand has changed. Often, both supply and demand are changing. The change in equilibrium price will be determined by which changes, supply or demand. If demand increases more than supply, the equilibrium price goes up. Does It Matter if Is at Its Equilibrium Level? When price is at its equilibrium level, there are no or of any goods or services. All buyers and sellers are happy with the market. Is a Signal serves as a signal that directs the allocation of toward producing the product with the demand.

24 What Are Controls? Sometimes the prevents markets from reaching an equilibrium price. It may do so by setting a price ceiling or a price floor. A price is a price that is set than the equilibrium price. Buyers and sellers cannot legally buy and sell a good for more than this price. A government may set a price ceiling if it wants to make a good for consumers to buy. The government can also set a price, which is a price that is set the equilibrium price. Buyers and sellers cannot legally buy and sell a good for less than this price. A government may set a price floor to a certain group of producers. 24 Controls and the Amount of Exchange ceilings and price floors have the unintended result of reducing the amount of in the economy. SUPPLY AND DEMAND IN EVERYDAY LIFE Why the Long Lines for Concert Tickets? When some people are unable to purchase a good that they are willing and able to purchase, it means that quantity demanded exceeds quantity supplied. The result is a in the market. The Difference in s for Candy Bars, Bread, and Houses In general, the price of many consumer goods is throughout the United States. You can expect to pay approximately the same for a candy bar, or a loaf of bread, in any state. prices demonstrate the impact of supply and demand. A house in San Francisco, California, will sell for approximately to times the price of a similar house in Louisville, Kentucky. Why don t these two houses move toward an equilibrium price? Because of supply and demand. The houses come with the on which they are built, and suppliers cannot pick up the land and move it to an area where there is higher demand. When the supply of a good cannot be in response to a difference in price between cities, as in our real estate example, prices for this good are likely to remain different in different cities. Supply and Demand at the Movies Have you noticed that ticket prices to see a movie on Friday night are different than ticket prices for Sunday afternoon? A theater has a number of seats. In response to higher demand on Friday night, it charges a higher price for those tickets.

25 25 Supply and Demand on a Freeway Most of the time, traffic is able to move freely on the freeway. However, during rush hour, the demand for freeway space increases. This results in a of space and in traffic. One solution to freeway congestion is to build freeways. Building more freeway space will increase the, helping to meet demand. Another is to convince people to. Carpooling will reduce the, helping to reduce or eliminate the shortage. Yet another solution to freeway congestion is to charge a for freeway use. Supply and Demand on the Gridiron Supply and demand even plays a part in high school athletics. There are a limited number of on some teams, and several people may for each spot. Athletes will have to train harder and impress the coaches to secure a spot when demand exceeds supply. Supply and Demand on the College Campus Some colleges require higher GPAs or higher standardized test scores to gain admission. A college that is in demand will have higher entrance. Necessary Conditions for a High Income: High Demand, Low Supply To earn a high, a person must perform a job that is in high demand and that not many other people can do. If few know how to do the job, then supply will be low. supply and demand will result in relatively higher wages. Review Questions (complete this on your own) All markets are necessarily in equilibrium at all points in time. Agree or disagree. Explain. Alfred Marshall, the British economist, compared supply and demand to the two blades of a pair of scissors. Explain his thinking. Some NBA players receive annual incomes of several million dollars. Explain their high salaries in terms of supply and demand.

26 26 Applying the Principles CHAPTER 6, SECTION 1 In a market, supply and demand work together to determine the price of a good. Write your answers to questions in the blanks provided to be sure you understand the different market conditions and how they affect price What market condition exists when quantity supplied is greater than quantity demanded? 123. What happens to price when the market condition in question 122 exists? 124. What market condition exists when quantity demanded is greater than quantity supplied? 125. What happens to price when the market condition in question 124 exists? 126. What market condition exists when quantity demanded is equal to quantity supplied? 127. Do markets tend to move toward shortage, surplus or equilibrium? Suppose that in the market for gadgets, the quantities demanded and supplied at various prices are as shown in the following table, and answer question 128. SUPPLY AND DEMAND IN THE GADGET MARKET $.9 Quantity Quantity Demanded Supplied $ $ $ $ $ $ $ $ $.8 $.7 $.6 $.5 $.4 $.3 $.2 $ Quantity 128. Use the information in the table to draw the supply and demand curves for the gadget market on the following grid. Label the vertical axis "" and label the horizontal axis "Quantity." Use the prices and quantities demanded in the table to plot the demand curve. Label it D l. Use the prices and quantities supplied in the table to plot the supply curve. Label it S l. Use the graph you created in question 128 to answer questions The equilibrium price in the gadget market is $. 13. At the equilibrium price, sellers want to sell gadgets and buyers want to buy gadgets If the price of gadgets rises to $.7, sellers will want to sell gadgets and buyers will want to buy gadgets A price rise to $.7 will result in a (surplus or shortage) of gadgets If the market condition in question 48 exists, prices will (rise or fall) and price will settle at $ If the price of gadgets falls to $.3, seller will want to sell gadgets and buyers will want to buy gadgets A price fall to $.3 will results in a (surplus or shortage) of gadgets If the market condition in question 5 exists, prices will (rise or fall) and price will settle at $.

27 is a way for buyers and sellers to communicate with each other. It signals a change in the market for a good. Fill in each blank in questions with the correct word When a market experiences a shortage, price will (increase or decrease) When a shortage occurs, supply and demand work together to influence price and move the market toward When a market experiences a surplus, prices will (increase or decrease). 14. When a surplus occurs, supply and demand work together to influence price and move the market toward. 27

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