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Econ 4/20/09 write answers on pg. 55

Econ 4/20/09 write answers on pg. 55. 1. Draw a supply/demand chart. 2. Draw an arrow pointing to the market- clearing price. Label it “MCP 1 ” 3. Show an increase in supply 4. Draw an arrow pointing to the new market- clearing price. Label it “MCP 2 ” 5. How did the MCP change?.

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Econ 4/20/09 write answers on pg. 55

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  1. Econ 4/20/09 write answers on pg. 55 1. Draw a supply/demand chart. 2. Draw an arrow pointing to the market- clearing price. Label it “MCP1” 3. Show an increase in supply 4. Draw an arrow pointing to the new market- clearing price. Label it “MCP2” 5. How did the MCP change?

  2. What happened to the price during this round? Why? • What happened to the amount bought/sold? • Could the seller(s) charge whatever price they wanted? Why or why not?

  3. Econ 4/20/09 write questions and answers How do we know what the best price of a product is? 2. Are all products subject to the laws of supply and demand? Why or why not? What products may not be effected by the laws of supply and demand? Why? a car? gas for your car? cigarettes if you are addicted to smoking? salt? a Cadillac Escalade?

  4. Demand and Supply get a little more complicated

  5. Determine Market Clearing Price P S The market-clearing price is where demand meets supply. D Q

  6. PRICE DETERMINATION (Establishing a Market Clearing Price) Price Quantity Quantity Surplus (+) / Demanded Supplied Shortage (-) 5 10 50 +40 4 20 40 +20 3 30 30 ----- 2 40 20 -20 1 50 10 -40

  7. What happens to market-clearing price when demand or supply change? S D1 D

  8. BUT WAIT…THERE’S MORE!!!

  9. Price Floor Sets a minimum price If floor is above MCP, price pushes towards MCP P S D Q

  10. Price Ceiling Sets a maximum price If ceiling is below MCP,price pushes up to MCP P S D

  11. Elasticity of Demand What is Elasticity of Demand? - a measure of consumer responsiveness to price changes In other words: If the price of a good changes, how much will people react? Will they keep buying that product?

  12. Elasticity of Demand Factors of elasticity 1. Availability of substitutes 2. Percentage of total income 3. Length of time In my view: all luxury items are elastic

  13. Elasticity of Demand Test for Elasticity of Demand: “When prices and total revenue move in opposite directions demand is elastic” In other words: If more people buy something when the price goes down and less people buy something when the price goes up, that product is elastic.

  14. Elasticity of Demand Are these elastic or inelastic?  airplane tickets? health care? ? car tires? cigarettes?  fresh tomatoes movies?

  15. Elasticity of Demand Formula showing level of elasticity Change in Quantity (%) Change in Price (%) If E > 1 then product is elastic If E < 1 then product is inelastic If E = 1 then product is unitary E=

  16. Elasticity of Demand Q: This is perfectly elastic demand. Why? A: Price never changes (quantity is unpredictable) P S D Q

  17. Elasticity of Demand Q: This is perfectly inelastic demand. Why? A: Quantity demanded does not change, no matter what the price is. P S D Q

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