Untitled Notes

Big Idea:
Economists use supply and demand models to analyze and illustrate factors affecting economic choices.
Framing Questions:
• What factors tend to contribute to economic change and stability?
Overall Expectation:
Supply and Demand Models: Students will demonstrate an understanding of supply and demand models, including how to apply these models, and of factors that affect supply and demand (FOCUS ON: Cause and Effect; Stability and Variability).
Specific Expectations:
• B2.1: Students will demonstrate an understanding of models of supply and demand, including price elasticity, and apply these models to analyze selected economic decisions.
• B2.2: Students will explain how various factors, including taxation, affect supply and demand.
Success Criteria:
• I can define elastic demand, inelastic demand.
• I can provide examples of elastic demand, inelastic demand.
• I can illustrate elastic, inelastic, unit elastic, perfectly elastic – demand/supply.
• I can calculate price elasticity, cross-price elasticity, income-elasticity demand.

Definition:
Elasticity of Demand is a measurement of consumer responsiveness to a change in price.
Key Questions:
• What will happen if price increases?
• How much will it affect Quantity Demanded?
• Who cares?
- Used by firms to help determine prices and sales.
- Used by the government to decide how to tax.

Characteristics:
• If price increases, quantity demanded will fall a little.
• If price decreases, quantity demanded increases a little.
• Consumers will continue to buy despite price changes.
Example Elasticities:
• 20% increase in price leads to 5% decrease in quantity demanded (Inelastic = Insensitive to a change in price).
Examples of Inelastic Demand:
• Gasoline
• Diapers
• Chewing Gum
• Medical Care
• Toilet Paper
Graphical Representation:
An inelastic demand curve is steep, resembling the shape of a letter “I.”

Characteristics:
• If price increases, quantity demanded will fall significantly.
• If price decreases, quantity demanded increases significantly.
• The amount people buy is sensitive to price changes.
Example Elasticities:
• Price increases lead to substantial decrease in quantity demanded (Sensitivity to price changes).
Examples of Elastic Demand:
• Boats
• Ferrari
• Gold
Graphical Representation:
An elastic demand curve is flat.

Price Elasticity of Demand (Ed) Formula:
E_d = \frac{\text{Change in quantity}}{\frac{\text{Sum of Quantities}}{2}} \div \frac{\text{Change in price}}{\frac{\text{Sum of prices}}{2}}

Elastic Examples:
• Beef: 1.27
• Ferrari: 1.60
• Gold: 2.6
Inelastic Examples:
• Gasoline: 0.20
• Medical Care: 0.31
• Electricity: 0.13
Perfectly Inelastic Demand:
For insulin for diabetics: Coefficient = 0
Unit Elastic Demand:
Occurs when % change in quantity demanded equals % change in price with coefficient = 1 (45-degree line).

Purpose:
Uses elasticity to show how changes in price will affect total revenue (TR).
TR = Price \times Quantity
Elastic Demand Implications:
• Price increase causes TR to decrease.
• Price decrease causes TR to increase.
Inelastic Demand Implications:
• Price increase causes TR to increase.
• Price decrease causes TR to decrease.
Unit Elastic Implications:
• Price changes lead to unchanged TR.
Example Scenario:
If demand for milk is inelastic, and the price increases, what will happen to TR on milk?

Example Calculation:
A to B price change example:
• Revenue at point A: 10 units sold at $100 = $1000 (TR)
• Revenue at point B: 5 units sold at $225 = $1125 (TR)
• Observation: Price decreased leading to increased TR, indicating demand is elastic (125% responsiveness).

Definition:
Elasticity of Supply shows how sensitive producers are to a change in price.
General Characteristics:
• Elasticity of supply depends on time limitations; producers need time to increase production.
Inelastic Supply:
• Insensitive to a change in price, represented by a steep curve.
• Most goods exhibit inelastic supply in the short-run.
Elastic Supply:
• Sensitive to a change in price, illustrated by a flat curve.
• Most goods have elastic supply in the long-run.
Perfectly Inelastic Supply:
• Quantity does not change regardless of price changes, represented by a vertical line.

Definition:
Cross-Price Elasticity shows how sensitive the quantity demanded of one product is to changes in the price of another good.
Key Formula:
\text{Cross-Price Elasticity} = \frac{% \text{ change in price of product "a"}}{% \text{ change in quantity of product "b"}}
Interpretation of Coefficient:
• If coefficient is negative (inverse relationship), goods are complements.
• If coefficient is positive (direct relationship), goods are substitutes.
Example:
If product P increases by 20% and product Q decreases by 15%, it indicates a relationship between goods.

Definition:
Income elasticity shows how sensitive a product is to a change in income.
Key Formula:
\text{Income Elasticity} = \frac{% \text{ change in income}}{% \text{ change in quantity}}
Interpretation of Coefficient:
• If coefficient is negative (inverse relationship), the good is inferior.
• If coefficient is positive (direct relationship), the good is normal.
Examples:
If income falls by 10% and quantity falls by 20%, or income increases by 20% while quantity decreases by 15%, this implies the good is inferior.