Elasticity of Demand and Supply

Wednesday February 29, 2012 – Periods 1 & 3
Thursday March 1, 2012 – Periods 4 & 6

Today we learned that the degree in which a demand or supply curve reacts to a change in price is elasticity. Elasticity varies among products because some products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. A price increase of a good or service that is considered less of a necessity will deter more consumers because buying the product will be too high a cost.

A good or service is considered to be elastic if a slight change in price leads to a large change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and consumers may not necessarily need them in their daily life. An inelastic good or service is one in which changes in price experience only modest changes in the quantity demanded or supplied. These goods tend to be things that are more of a necessity to the consumer in their daily life.

  If there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal. This flatter curve means that the good or service in question is elastic.

  Inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price.

  Elasticity of supply works similarly. If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic.

  If a change in price only results in a minor change in the quantity supplied, the supply curve is steeper and is inelastic.

There are three main factors that influence a demand’s price elasticity. The first factor is the availability of substitutes. This is probably the most important factor influencing the elasticity of a good or service. The more substitutes, the more elastic the demand will be.

The second influential factor is the amount of income available to spend on the good – This factor affecting demand elasticity refers to the total a person can spend on a particular good or service. If there is an increase in price and no change in the amount of income to spend on the good, there will be an elastic reaction in demand.

The third influential factor is time. If the price of a good or service goes up and there are very few available substitutes, consumers will most likely continue buying the product. This means that the good or service is inelastic because the change in price will not have a significant influence on the quantity demanded. If consumers find that they cannot afford to spend the extra cost and begin to buy less of the product over a period of time, the price elasticity of the good or service for that consumer becomes elastic in the long run.

There are four main factors that affect the elasticity of supply. The first factor is spare production capacity If there is plenty of spare capacity then a business should be able to increase its output without a rise in costs. Therefore supply will be elastic in response to a change in demand. The supply of goods and services is often most elastic in a recession, when there is plenty of spare labor and capital resources available to step up output as the economy recovers.

The second factor is stocks of finished products and components If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand quickly by supplying these stocks onto the market and supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher and unless stocks can be replenished, supply will be inelastic in response to a change in demand.

The third factor is the ease and cost of factor substitution If both capital and labor resources are mobile then the elasticity of supply for a product is higher than if capital and labor cannot easily and quickly be switched

Finally, the fourth factor is the time period involved in the production process. Supply is more elastic the longer the time period that a firm is allowed to adjust its production levels.

Price Ceilings and Price Floors

Monday February 27, 2012 – Periods 1 & 3
Tuesday February 28, 2012 – Periods 4 & 6

  Today we learned that price ceilings are maximum prices set by the government for goods and services that they believe are being sold at too high of a price and consumers need some help purchasing them. Price ceilings become a problem when they are set below the market equilibrium price. When the ceiling is set below the market price there will be excess demand or a supply shortage. Producers won’t produce as much at the lower price while consumers will demand more because the goods are cheaper. Demand will outstrip supply so there will be a lot of people who want to buy at this lower price but cannot. Producers are harmed as their surplus is hit with a reduction in the number of firms willing to take the lower price and those who remain in the market have to take a lower price. The shortage of goods can lead to consumers having to line up to get the good, government rationing, and even the development of a black market dealing with the scarce goods.

Price floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and producers deserve some assistance. Price floors are an issue when they are set above the equilibrium price. When they are set above the market price then there will be an excess supply or a surplus. Producers will produce the larger quantity where the new price intersects their supply curve. Consumers will not buy that many goods at the higher price and so those goods will go unsold. Producers can gain as a result of this policy. Consumers will lose with this kind of regulation as some people are priced out of the market and others have to pay a higher price than before.

Market Equilibrium

Wednesday February 22, 2012 – Periods 4 & 6
Thursday February 23, 2012 – Periods 1 & 3

  Today we learned that to find market equilibrium, we combine the two curves, supply and demand, onto one graph. The point of intersection of the supply and demand curves marks the point of equilibrium. This point of intersection shows the market price at which quantity demanded equals quantity supplied.

If the price were lower, quantity demanded would be greater than quantity supplied and a shortage occurs. Shortages put pressure on prices to rise. If the price were higher, sellers would want to sell more than buyers would want to buy and a surplus occurs. Surpluses put pressure on prices to fall. The market naturally wants to shift back to equilibrium.

 When one of the curves shifts right or left in response to outside factors, a shift occurs. It is only through a shift in either the supply or the demand curve that the market equilibrium will change. The rightward shift of the demand curve causes a movement up the supply curve. This creates a new market equilibrium, which has both a higher price and a higher quantity than the previous market equilibrium.

Supply

Friday February 17, 2012 – Periods 4 & 6
Tuesday February 21, 2012 – Periods 1 & 3

Today we learned that supply is defined as the quantities of output that producers will bring to market at each and every price. Supply can be presented in the form of a supply schedule, or graphically as a supply curve. The Law of Supply states that more output will be offered for sale at higher prices and less at lower prices. A change in quantity supplied is represented by a movement along the supply curve, whereas a change in supply is represented by a shift of the supply curve to the left or right. Changes in supply are caused by changes in the cost of inputs, productivity, technology, taxes, subsidies, expectations, government regulations, and the number of sellers in the market.

Demand

Wednesday February 15, 2012 – Periods 4&6
Thursday February 16, 2012 – Periods 1&3

Today we learned that demand is the amount of goods and services that consumers are willing and able to buy at various prices. The law of demand states that as price goes up, the quantity demanded goes down, and vice versa. Real income, possible substitutes, and diminishing marginal utility help explain the inverse relationship between price and quantity demanded. Quantity demanded is based on price. Demand, however, is affected by several factors, called the determinants of demand: changes in population, changes in income, changes in tastes and preferences, substitutes, and complementary goods. A demand curve is the graph that shows the relationship between the price of an item and the quantity demanded. A change in demand for a particular item shifts the entire demand curve to the left or right.

Economic Systems Strengths and Weaknesses

Monday February 13, 2012 – Periods 4 & 6
Tuesday February 14, 2012 – Periods 1 & 3

  Today we learned that one of the few advantages existing in a traditional economy is that the roles of individuals are clearly defined. Every member of the society knows exactly what they are to do and most don’t have any complaints about it. There are also many disadvantages to this type of society. These societies are often very slow to change and when new technologies are introduced, these ideas and techniques are discouraged.

Command economies focuses on equality and the government tries to eliminate all private property and distribute its good equally. If done correctly no one is in poverty and no one is wealthier than another. Social services are also emphasized in this type of economy. The government will provide equal health care, education opportunities, and make sure all people are fed. Another strength pf this type of economy is that it is capable of rapid change for major problems. The government owns the companies, so if production needs need to be shifted into a different area, the government is capable of doing it rather quickly. Finally, command economies are very stable. Command economies will never have sudden depressions. Command economies also have many weaknesses. In a command economy there is very little freedom. The individual usually doesn’t have the opportunity to decide what they want to do for a career, and they have no control over the goods they receive. Another major problem is that there is little reason for innovations, hard work, or quality of the work. Since no one makes more money than everyone else, the people feel like there is no reason to work hard. Another weakness is that there is little focus on consumer wants. Finally, when it comes to minor day-to-day changes, the government has a hard time coping with them.

A strength of a market economy is it can adjust to change easily. If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government. People have the ability to make as much money as they can and do what is in their best interest. Another strength of a market economy is that the government tries to stay out of the way of businesses. Although the government sets certain standards businesses must follow, for the most part businesses can do as they please, allowing them to produce what they want, how they want. The market economy produces a great variety of goods and services for consumers. If there is a demand for a good or service, the demand will almost always be met in a market economy. A weakness of a market economy is that it doesn’t always provide the basic needs to everyone in the society. The weak, sick, disabled, and old sometimes have trouble providing for themselves and often slip into poverty. Another problem is that it becomes hard for a government with so many private businesses to provide adequate defense, education, and health care to its people. Another weakness to this type of economy is that there is uncertainty in the business world. One company could easily be forced out of business causing all of its employees to become unemployed and lose their means of income. Finally, there are market failures. This can cause some companies to become too powerful and become a monopoly. If the government doesn’t step in, the monopoly can take advantage of the consumers and charge higher prices.

Economic Systems

Wednesday February 8, 2012 – Periods 1 & 3
Thursday February 9, 2012 – Periods 4 & 6

  Today we learned that the way a nation determines how to use its resources to satisfy its people’s needs and wants is called an economic system. Each type of system is labeled according to how it answers the basic economic questions of What, How, and For Whom to produce. The major economic systems in use today are traditional, command, market, and mixed. In the traditional economy, the basic questions are answered by tradition, customs, and even habits handed down from generation to generation. In a command economy, a central authority answers the three basic questions. In a market economy, decision making is decentralized with consumers and entrepreneurs playing a central role. Most economies in the world today feature some mix of traditional, command, and market economies. A nation’s values and goals influence its choice of economic systems. The major economic and social goals used to evaluate the performance of an economic system are economic freedom, economic efficiency, economic equity, economic security, full employment, price stability, and economic growth.