Microeconomics

1. Microeconomics Supply, Demand, and Price

2. Standard • SSEMI2- The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy. • Define the Law of Supply and the Law of Demand. • Describe the role of buyers and sellers in determining market clearing price • Illustrate on a graph how supply and demand determine equilibrium price and quantity. • Explain how prices serve as incentives in a market economy • Essential Question: How does quantity demanded and price impact each other?

3. Quick Review • 3 Economic Questions • What to produce? • How much to produce? • Who gets what?

4. Supply and Demand Overview • In a market system the interaction of buyers and sellers determines the prices of most goods as well as what quantity of a good will be produced • Buyers demand goods • Sellers supply goods • Interactions between the groups lead to an agreement on prices and quantity traded

5. Demand • Demand- the desire to own something and the ability to pay for it • The Law of Demand- Consumers buy more a good when its price decreases and less when its price increases

6. Demand Schedule Demand Schedule- a table that lists the quantity of a good a person will buy at each different price Market Demand Schedule- a table that lists the quantity of a good all consumers in a market will buy at each different price; allows business owners to predict sales at several different price levels

7. Demand Graph • Demand Curve- a graphic representation of a demand schedule • Vertical Axis- labeled with the lowest possible prices at the bottom and the highest at the top • Horizontal Axis- lowest quantity at the left and highest quantity at the right

8. Demand Curve • Demand curves only show the relationship between the price of the good and the quantity purchased; they assume ceteris paribus- Latin phrase that means all other things are held constant • Demand curves on the graph slopes downward to the right; as price decreases, demand increases

9. Market Demand Curve 3.00 2.50 2.00 1.50 1.00 .50 0 Price per slice (in dollars) 200 250 350 300 0 50 100 150 Slices of pizza per day Demand Curve This illustrates our market demand schedule for pizzas from earlier. Demand

10. Shifts of the Demand Curve • Changes in Demand • A demand curve is accurate as long as there are no changes other than price that could affect the consumer’s decision • When ceteris paribus is dropped and other factors change the entire demand curve shifts • Increase in demand- the curve shifts right • Decrease in demand- the curve shifts left • A shift if the demand curve means that at every price consumers buy a different quantity than before

11. What Changes Demand? • A change in price does NOT cause the demand curve to shift- price changes are already built in

12. What Changes Demand? • Recall the definition • Taste (desire) • Income (ability to pay) • Complimentary Items • Substitutes • Expectations

13. As we grow up, hear information, learn more etc our opinions and feelings change The way we want, desire, feel or like something is TASTE Taste

14. Due to our salary, pay checks, job opportunities we have more or less money to spend. This change in Income changes our ability to buy Income

15. These items go together. For example if the cost of peanut butter goes way down, we desire more jelly. (if cost goes up we will desire less jelly) Complimentary Goods

16. These items can be exchanged for the other. If the cost of peanut butter goes way up, we may buy more pizza for lunch. Pizza can be exchanged for PB and J sandwiches. Substitutes

17. Expectations • What people anticipate will occur in the future

18. What Changes Demand? • Remember TICSchanges demand!! • Taste (desire) • Income (ability to pay) • Complimentary Items • Substitutes • Expectations

19. Elasticity of Demand • Elasticity of Demand- a measure of how consumers react to a change in price • Inelastic- the demand for a good you will keep buying despite a price increase • Elastic- describes that demand is sensitive to a change in price

20. Calculating Elasticity • Remember that the law of demand says that whenever there is an increase in price, there will be a decrease in demand • Price range helps to determine the elasticity of a price • Demand for a good at one price may be elastic but at another price the same good might be inelastic

21. Calculating Elasticity Elasticity is calculated by using the following formula: Elasticity of Demand= percentage change in demand of a good percentage change in the price of the good Percentage Change= Original number-New Number X 100 Original Number Results may be negative, but all negatives are dropped.

22. Values of Elasticity • If the elasticity of demand for a good is less than 1, demand is inelastic • If elasticity is greater than 1, demand is elastic • If elasticity is equal to 1, demand is unitary elastic

23. If the price of a pizza goes up from $1 to $1.50, and the quantity of the pizza fell from 4 to 3. The change in price is ____ The change in quantity demanded is ___ Is the price of pizza elastic or inelastic? Elasticity

24. Factors Affecting Elasticity • Availability of substitutes- Lack of substitutes makes a good’s demand inelastic; substitutes makes a good’s demand elastic • Relative importance- how much of your budget you spend on a good will determine its elasticity • Necessities versus luxuries

25. Change Over Time • Consumers often take time to respond to price changes- demand is inelastic for the short term • Demand for a good becomes elastic as consumer find substitutes

26. Elasticity and Total Revenue • Total revenue is defined as the amount of money the company receives by selling its goods • If a good is elastic, an increase in price may cause a firm’s total revenue to go down • If a good is inelastic, an increase in price will make up for lower sales

27. Elasticity and Pricing Policies • Firms use elasticity of a good to figure out whether or not it would be helpful or harmful to their revenue to raise the price of a good.

28. Total Revenue and Price If Price Increases & total revenue increases= inelastic If Price decrease & total revenue decreases= inelastic If Price increases & total revenue decreases= elastic If Price decreases & total revenue increases= elastic

29. Are the Following Elastic or Inelastic? Salt New Cars Pork Chops European Vacation Insulin Insulin at one of four drug stores in a shopping mall Gasoline purchased on day after a 20% price increase Gasoline purchased one year after a 20% price increase

30. Supply • Supply- the amount of goods available; used by economists to refer to the relationship between price and quantity supplied • Law of Supply- tendency of suppliers to offer more of a good at a higher price; the higher the price the larger the quantity produced • Quantity Supplied- the amount a supplier is willing and able to supply at a certain price

31. Supply Continued • As the price of a good rises, existing firms will produce more in order to earn additional revenue • New firms have an incentive to enter the market to earn a profit for themselves • If the price falls, some firms produce less and others might drop out of the market

32. Higher Production • If a firm is earning a profit then an increase in price- ceteris paribus- will increase the firms profits

33. The Supply Schedule • Supply Schedule- a chart that lists how much of a good a supplier will offer at different prices • Market Supply Schedule- a chart that lists how much of a good all suppliers will offer at different prices • Like demand schedules a change in price is built in the schedule

34. The Supply Graph • Supply Curve- a graph of the quantity supplied of a good at different prices • Vertical- price • Horizontal- quantity of the good supplied • Rises from left to right • Market Supply Curve- a graph of the quantity supplied of a good by all suppliers at different prices

35. Market Supply Curve 3.00 2.50 2.00 1.50 1.00 .50 0 Supply Price (in dollars) 0 500 1000 1500 2000 2500 3000 3500 Output (slices per day) Supply Curve

36. What Changes Supply? Recall The Definition Sellers Technology Regulations Input Costs Productivity Expectations

37. Depending on the circumstance there are sometimes more or less sellers based on competition or product availability Sellers

38. This changes the manner in which we make our products This deals with efficiency Technology

39. Regulation- a government intervention in a market that affects the production of a good Subsidy- a government payment that supports a business or market Excise Tax- a tax on the production or sale of a good (ex. Tax on cigarettes) Regulations

40. Input Costs • This involves the changes that effect the materials, fixed cost and other variable costs it takes to produce the product.

41. This changes the manner in which we make our products This deals with efficiency And often focuses on the people and training Productivity

42. What is going to happen…how do businesses prepare for it? Ex. Christmas Production Expectations

43. Sellers Technology Regulations Input Costs Productivity Expectations This is why you need to remember

44. Supply and Elasticity • Elasticity of Supply– a measure of the way quantity supplied reacts to a change in price • If elasticity is greater than 1, supply is elastic- supply is sensitive to change in price • If elasticity is less than 1, supply is inelastic • If elasticity is equal to 1, supply is unitary elastic

45. What affects elasticity of supply? • Time • In the short run, a firm cannot easily change its output level, so supply is inelastic. • In the long run, firms are more flexible, so supply can become more elastic

46. The point at which quantity demanded and quantity supplied come together is known as equilibrium (market clearing price). Finding Equilibrium Equilibrium Point Combined Supply and Demand Schedule $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Price of a slice of pizza Quantity demanded Quantity supplied Result $ .50 300 100 Shortage from excess demand a Price per slice Equilibrium Price $1.00 250 150 $1.50 200 200 Equilibrium Equilibrium Quantity $2.00 150 250 Supply Demand Surplus from excess supply $2.50 100 300 0 50 100 150 200 250 300 350 350 $3.00 50 Slices of pizza per day

47. Combining Supply and Demand • At Equilibrium the market for a good is stable • The Equilibrium Price and Quantity can be found where quantity supplied equals quantity demanded or where the two curves cross.

48. Disequilibrium • Disequilibrium- describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market • Excess Demand- when quantity demanded is more than quantity supplied • Sellers will raise their prices • Excess Supply- when quantity supplied is more than quantity demanded • Sellers will lower their prices • Interactions between buyers and sellers will always push the market back towards equilibrium.

49. Government Intervention • Price Ceiling- a maximum price that can be legally charged for a good or service • Rent Control- a price control placed on rent (has occurred in New York City) • What do you think are the problems with rent control?

50. Government Regulation • Price Floor- a minimum price for a good or service • Minimum Wage- minimum price that an employer can pay a worker for an hour of labor • Minimum Wage can cause a surplus of labor