Download Chp. 5: Supply and Demand

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Chp. 5: Supply and Demand
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Notes
Chp. 5: Supply and Demand
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Objectives about The Price System
EPF.3 The student will demonstrate knowledge of the price system by
a) examining the laws of supply and demand and the determinants of each
b) explaining how the interaction of supply and demand determines equilibrium price
c) by describing the elasticity of supply and demand
d) examining the purposes and implications of price ceilings and price floors
Essential Understandings about The Price System
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When supply or demand changes, market prices adjust, affecting incentives. Prices send signals and
provide incentives to buyers and sellers.
Factors (other than the price of the good or service) which can influence demand or supply are called
determinants.
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby
allocates scarce goods and services.
Prices send signals and provide incentives to buyers and sellers. When supply or demand changes,
market prices adjust, affecting incentives.
A variety of factors influence the degree to which buyers and sellers respond to price changes.
Government-enforced price controls set above or below the equilibrium price distort price signals and
incentives to producers and consumers.
Price ceilings cause persistent shortages, whereas price floors cause persistent surpluses.
Price controls are often advocated by special interest groups.
Essential Questions about The Price System
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Notes
What is supply?
What is the law of supply?
What are the determinants of supply?
What is demand?
What is the law of demand?
What are the determinants of demand?
What is the role of prices?
How does a price change affect incentives for buyers and sellers?
What is a market?
How are market prices determined?
What is equilibrium price?
How can a supply-and-demand graph be used to find equilibrium price?
What happens when price for a good or service is higher than the equilibrium price?
What happens when price for a good or service is lower than the equilibrium price?
How does the graph show what happens to the equilibrium price when one of the determinants of demand or supply changes? What is elasticity?
What determines price elasticity of demand?
What determines price elasticity of supply?
What are government-enforced price ceilings and price floors?
Why might the government institute a price ceiling or price floor?
What are the effects of government-enforced price ceilings and price floors?
Chp. 5: Supply and Demand
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The Price System
I.
How do Demand and Price Interact?
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What is demand? what people are willing and able to buy at various prices
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Quantity demanded? a specific amount an individual is willing and able to buy at a given price
What is the Law of Demand? The law of demand states that as price increases, the quantity demanded decreases. If
price decreases, the quantity demanded increases
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A demand schedule is a table that shows the quantity demanded at each price
a.
When the data are graphed, the result is a demand curve
Emphasize that demand is represented by a curve on a graph, but quantity demanded is a specific
point on that curve. Make sure students use the terms accurately. They often say "demand" when they
mean "quantity demanded."
II. What Can Cause Demand to Change?
1.
Changes cause a shift in the curve
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a change in consumers’ incomes
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a change in consumers’ preferences
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a change in the prices of related goods or services (complements or substitutes)
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a change in the number of consumers in a market
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a change in the expectations of buyers.
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Price DOES NOT cause the demand curve to shift; price only affects the quantity demanded
PRACTICE
Notes
Chp. 5: Supply and Demand
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III. How Do Supply and Price Interact?
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What is supply? Supply is what producers are willing and able to supply at various prices
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What is the Law of Supply? states that as price increases, the quantity supplied for a good or service also increases, As
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Quantity supplied? the quantity producers are willing and able to supply at a specific price
price decreases, the quantity supplied for a good also decreases
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A supply schedule is a table that shows the quantity supplied at different prices
a.
When the data are graphed, the result is a supply curve
Emphasize that supply is represented by a curve on a graph, but quantity supplied is a specific point
on that curve. Make sure students use the terms accurately. They often say "supply" when they mean
"quantity supplied."
IV. What Can Cause Supply to Change?
1.
Changes cause a shift in the curve
2.
changes in the prices of productive resources used to make the good or the service
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changes in the technology used to make the good or the service
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changes in the profit opportunities available to producers by selling other goods or services
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changes in the number of sellers in a market
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changes in the expectations of producers.
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Price DOES NOT cause the demand curve to shift
PRACTICE
Notes
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V. Elasticity
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What is Elasticity? describes the degree to which buyers and sellers respond to price changes.
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Demand Elasticity – show consumers response to price.
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inelastic – consumer response is slight or not at all (usually with necessity products or goods that have no
substitutes, e.g. insulin, electricity, salt);
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elastic – consumer response to price change is large, would buy something else if price rose
Supply Elasticity – show producers response to price; as prices rise, producers want to make more;
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elastic producers will increase production when prices rise,
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inelastic producers can’t change in production due to a price increase
VI. Measuring Elasticity
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Calculations tell you whether a reaction is elastic or inelastic
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Demand elasticity = (% change in qty. demanded/ % change in price)
b.
Supply elasticity = (% change in qty. supplied/% change in price)
i. Ex. 75% (change in qty.)/ 50% (price change) = 1.25
c.
Numbers determine elasticity
i. If below 1, it is inelastic; if greater than 1, elastic
ii. If equal to 1, it is considered to be unitary elasticity
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Notes
Second way to measure elasticity is thru the Total Revenue Test
a.
Compares prices and quantities at different prices to see where revenue goes
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Calculated by quantities x price – put into chart
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If revenue continues to rise – inelastic
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If revenue continues to fall – elastic
What are some factors that affect demand elasticity?
a.
Availability of substitutes – if there are multiple substitutes makes the product elastic
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Price v. Income – what the increase in price is to your level of income
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Necessity v. Luxury – necessities usually considered inelastic
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Time needed to adjust – more time it takes for people to adjust can change elasticity rates
What are some factors that affect supply elasticity?
a.
Availability of inputs – not being able to get goods can slow production
b.
Mobility of inputs – how easily products can be moved to where they are needed for production
c.
Storage capacity – ability to store goods for production
d.
Time needed for adjustment – additional time allows supply chain to have time to get to producers
Chp. 5: Supply and Demand
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Vocab Chp 4
Directions: Fill in the definition for the term listed. Then, in the box on the right, you have to draw a picture OR
write the definition in your own words OR write a sentence using the word that demonstrates its meeting.
Demand
Processing (Illustration, Summarization, or Sentence)
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Law of Demand
Processing (Illustration, Summarization, or Sentence)
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Supply
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Processing (Illustration, Summarization, or Sentence)
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Law of Supply
Processing (Illustration, Summarization, or Sentence)
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Revenue
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Processing (Illustration, Summarization, or Sentence)
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Notes
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Summary
DIRECTIONS: Choose only one of the following:
a) write a summary (25-75 words) of what you believe was the most important aspect of the notes/lecture
b) write what you believe to be the most interesting or memorable part of the notes/lecture (25-75 words)
c) draw something that symbolizes the notes/lecture to you (has to be different than your title page)
Notes
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