Unit 4 The Price System

Unit 4: The Price System

The Law of Demand &
What causes demand to change?

Poll

How much would you pay for a candy bar?

• 50 cents

• 1 dollar

• 2 dollars

• More than 5 dollars

How is the price for a good/service determined?

A combination of supply and demand!

1.The Supply = How much is made available by the producer

2.

The Demand = How much is demanded by the consumer

Demand=the amount of a good or service that consumers are willing to buy

​What is Demand?

●

The Law of Demand
○

consumers are willing to buy (demand) more of a good or
service when prices go down

○

Consumers will demand less when prices increase

Is this true?

When a good becomes cheaper, people see it as a deal and will
want or demand more of it.

The opposite is true when the price of something goes up; people
see it as expensive and are less likely to buy it.

What is the law of demand?

How Demand Works

If the price
of a good
goes up

(Increases)

Demand for

the good

will

increase

Demand for

the good

will

decrease

If the price
of a good
goes down
(Decreases)

Then

Then

What does demand look like on a chart?

Demand can be shown on a Demand Schedule Chart

Demand Schedule for iPads

Price for One iPad

Demand for iPads

If the price for one Ipad is $1000

5 people would demand it

$800

10

$600

15

$400

20

How can demand be shown on a Graph?

Demand Schedule for iPads

Price for One

iPad

Demand for

iPads

If the price for one
Ipad is $1000

5 people would
demand it

$800

10

$600

15

$400

20

What are 5 factors that can change demand?

Besides price, other factors can impact demand (CTIPS)

Complementary Goods

Tastes

Income

Population

Substitute Goods

Complementary goods are goods that are used together.

For example: Peanut butter is often used with jelly.

-If demand for PB decreases for some reason then so will jelly

-If the demand for PB increases then the demand for jelly will also
increase

How does complementary goods change demand?

Open Ended

If Pizza prices went up 200%, what would you eat instead?

-If a good is popular or considered fashionable then the demand for
the good will increase

-If a good is unpopular or disliked, there is a decrease in demand
for it

How does consumer taste change demand?

Poll

Do you have the same fashion choices and opinions that you did 4 years ago?

• Yes

• No

How does income change demand?

The more money people make, the more they are able to spend
(demand)

-Higher incomes lead to an increase in demand

-Lower incomes lead to a decrease in demand

Open Ended

If money were not an issue, what kind of car would you drive to school?

An increase in the number of people, means more people are able
to buy a good

Increase in population=Increase in demand

Decrease in population=Decrease in demand

How does population change demand?

Open Ended

What is a business that you think Bedford would have if there was a higher population?

A good that can take the place or be replaced by another good

For example: If the price of Sprite goes up, people can substitute it
with Seven-Up instead.

This would lead to an increase in demand for Seven-Up

What is a substitute good?

The five factors (CTIPS) that change demand will cause the demand
curve line in a graph to shift either left or right

Left Shift=one of the factors decreases demand

Right Shift=one of the factors increases demand

What is a demand curve shift?

The Law of

Supply & What causes supply to

change?

The amount of a good or service that producers are willing and able
to produce

What is Supply?

The Law of Supply

As price increases, supply will increase

As prices decreases, supply will decrease

What is the law of supply?

How Supply Works

If the price
of a good
goes up

(Increases)

Supply for
the good

will

increase

Supply for
the good

will

decrease

If the price
of a good
goes down
(Decreases)

Then

Then

What does supply look like on a chart?

Supply can be shown on a Supply Schedule Chart

Supply Schedule for Pizza

Price of Pizza

Supply of Pizza

$.50

1,000

$1.00

1,500

$1.50

2,000

$2.00

2,500

$2.50

3,000

$3.00

3,500

How can supply be shown on a graph?

●

The supply curve is only accurate when there are no changes
other than price

●

When other factors affect the supply, the curve will shift to either
the left (less supplies) or the right (more supplies)

○Changes in costs of productions

○Price of resources change

○Maximize profit

Change in Supply

If a producer can find a cheaper way to produce a product, the
supply curve will change

Humans writing books-time consuming and expensive

Computers can print faster and cheaper

More books offered at lower prices

How does change in the costs of production affect supply?

●

Human resources: pay workers more, changes supply (produce
less pizzas)

●

Natural resources: price of cheese increases, produce less pizzas

●

Capital increases: rent increases, produce less pizzas

How do prices of resources change?

If a producer makes more profit selling one product than another,
the supply for both product changes

Price of DVD’s and VCR tapes remain the same, but I can make more
profit on DVD’s

Reduce the supply of VCR tapes and increase the supply of DVD’s

How does maximizing profit affect supply?

If an item is scarce, then there is little to no supply

Gas-even if the price goes up, it can be hard for oil companies to
get more gasoline to consumers

​What about Scarcity?

Supply is going to increase because no one is buying the product

During the Montgomery Bus Boycott there was an increased supply
of bus seats since no one was riding the bus

​What if we boycott a product?

Increase in supplies needed for the disaster (War supplies increase
during times of war)

Decreased in other supplies (supplies that are not necessary)

​What about a Global/National Disaster?

Equilibrium

& Elasticity

What is the purpose of Supply and Demand?

They determine the price for a good or service

•The forces of supply and demand act
in opposite ways when it comes to the
price for goods and services.
•Eventually, the producer and
consumers will come to an agreement
with the price.

How does supply and demand work together?

What is it called when producers and consumers agree on a price?

Equilibrium Price

How is equilibrium shown on a graph?

Equilibrium is located where
the supply curve line and
demand curve line intersect.

Shortage=not enough or too few goods to meet the demand of the
consumers

-occurs when producers set their prices too low

Surplus=too much or excessive goods that could not be sold

-occurs when producers set their prices too high

The difference between shortage and surplus

Shortage

Surplus

Elasticity

What is Elasticity? Elasticity is how economists describe how producers and consumers
react to price changes

-If a producer/consumer react heavily to a small price change, their
demand is elastic

-like a rubber band

-If a producer/consumer only react slightly to a price change to a
large price change, their demand is inelastic

-like a paper clip

Step 1: Calculate Percent Change in Price

(original price) - (new price) .X 100

original price

Step 2: Calculate Percent Change in Quantity Demanded (OR
Quantity Supplied if we are talking about Producers)
(original quantity demanded) – (new quantity demanded) .X 100

original quantity demanded

Step 3: Calculate Elasticity

Percent change in Quantity Demanded .= ELASTICITY

Percent change in price

How to Calculate Elasticity

Once you determine your elasticity coefficient, the following chart
describes your degree of elasticity:

Outcome

Elasticity

0

Perfectly Inelastic

<1

Relatively Inelastic

1

Unit Elastic

>1

Relatively Elastic

∞

Perfectly Elastic

​What do the numbers mean?

​Graph of Elasticity

1-Availability of substitutes

-Wide variety of alternatives then you can buy a different product, if there are not

many alternatives then you will have to keep buying your product even with price
changes
2-Relative importance

-If a product is a large portion of your budget you will respond more to the price

changes, if it is a small portion of the budget then you will have less reaction to the
changes
3-Needs vs Wants

-Needs are less likely to get a reaction to price changes, wants see more reaction

to price changes
4-Change over time

-In a short term, consumers may not react to price changes, but as time goes on

then they will be able to find substitutes

What impacts elasticity of demand?

-Effortlessness of switching

-Time needed to produce

-Number of producers

-Spare capacity

-Ease of storage

-Time frame of training

-Mobility of factors

-Reaction of costs

What impacts elasticity of supply?

Elasticity is important to businesses because it shows how price
changes will impact their profit and total revenue.

• When a products demand is Elastic consumers are more

responsive to price change. Eventually, with enough of a price
increase, total revenue will decrease.

Elasticity Impact on Revenue

$ Price of a slice of pizza

Quantity Demanded

Total Revenue

$1

300

$300

$2

250

$500

$3

200

$600

$4

150

$600

$5

100

$500

$6

50

$300

• When a products demand is Inelastic consumers are less

responsive to a change in price. So as a business increases their
price, they will also increase their total revenue. Additionally, if
they decrease their price they will decrease their total revenue.

$ Price of Gas

Quantity Demanded

Total Revenue

$2.00

300

$600

$2.50

280

$700

$3.00

260

$780

$3.50

240

$840

$4.00

220

$880

$4.50

200

$900

​Elasticity Impact on Revenue

If you need to find Elasticity based on Price and Total Revenue, use
this trick:

•Price ⬆

, Total Revenue ⬆

= Inelastic

•Price ⬇

, Total Revenue ⬇

= Inelastic

•Price ⬆

, Total Revenue ⬇

= Elastic

•Price ⬇

, Total Revenue ⬆

= Elastic

Helpful Hint

Price Controls

Besides Supply and Demand, What else can determine prices?

The Government!

Price Ceilings

-the maximum (highest) price for a good or service

-Usually necessitates (gas, rent)

Price Floors

-the lowest price for a good or service

-minimum wage

How does the government do this?

Why might the government fix prices?

1-To deal with a shortage of goods

2-To make goods more affordable

3-To discourage the use of a good

4-To improve wages