Name: Date: Period: Demand Worksheet 2 Part I: Identifying the determinants of demand. You have seen have how an increase in demand is depicted on a graph by a shift in the demand curve. © Movement along the curve according to the law of demand (if prices rise, quantity demanded decreases; if prices fall quantity demanded increases) reflects changes in quantity demanded. © When quantity demanded changes at every price point it is considered a change in overall demand and entire curve will shift. © When the demand curve shifts upward and to the right, this is indicative of an inerease in demand. ‘+ When the demand curve shifis to the left, this is indicative of a decrease in demand. Factors that result in a change in demand are the determinants of demand. Working as a part of a team of three or four, complete the table below. For each determinant of demand: 1. Indicate whether demand will increase or decrease 2. Provide an explanation as to why. Determinant of demand — | Demand increases ‘Explanation or decreases? Population increases Population decreases Tncrease in most peoples” income ‘Decrease in most peoples’ income Price of substitute increases Price of substitute decreases Price of complementary good increases Price of complimentary good decreases [Product becomes @ popular fad | | Product now out of fashion — | | Expectation of a future fallin the price of a good/service Expectation of a fature rise in the price of good/servicePart I: Movement along the curve or a shi the demand curve? Complete the table below by indicating whether each scenario results in a change in the quantity demanded (movement along the demand curve), or a change in demand (shift in the demand curve). If there is a shift in the demand curve, indicate whether the curve shifis right (increase) or left (decrease), Scenario Shift left, Shift right, or movement along, curve ‘Determinant (what caused the shift) Good: Hand Sanitizer Headline: There is an outbreak of the flu. Lines of shoppers seen at Walgreens Service: Nail Care Headline: A nail salon cuts the price it charges for manicures and more clients come. Good: Burgers Headline: Potato Prices rise to all time high leading to Freneh Fry crisis, Good: Diapers Headline: The US Census Bureau has announced that there is baby boom in the United States. Consumers flock to Babies R Us Good: Bicycles Headline: John's Bicycle shop increases the prices of bicycles and sales decrease. Good: Jeans Headline: E Television reports that Beyonce and Justin Beiber will be wearing only denim this year. Consumers flock to stores Good: LCD Televisions Headline: US economic report that 55% of employers cut wages in 2012, Good: Pepsi Cola Headline: Coca Cola loses contract with sugar cane producers in Guatemala leading to a 30% increase in prices for allof their beverages. Good: Beef Headline: Increase in grain prices in June! Cattle ranchers looking to pass xtra costs on to consumers by late August. Good: Gasoline Headline: Exxon, Chevron, and BP report overproduction at refining facilities: prices to bottom out in summer 2013 Create Your Own Headlines: curve (no change) in overall demand, hoose 3 of the determinants of shifting demand and create a headline that would cause a shift right in overall demand (increase), shift left in overall demand (decrease), and one that would be movement along the Good: Headline: Good: Headline:Name: Date: Per: PRICE ELASTICITY OF DEMAND WORKSHEET 1 Elasticity of Demand: Measure of how responsive quantity is to a price change. The higher the measure then the more respon: Part I: Elastic or Inelastic e consumers will be to a change in price according to the Law of Demand. The lower the measure then the less responsive consumers will be to a change in price according to the Law of Demand Directions: For the following goods below identify if the good is likely to be price elastic or inelastic, then provide and explanation why. Good/Service Elastic/Inelastic [Explanation Hamburgers Sandwich at Beach Hut Deli Fresh Carrots Luxury Automobile ‘Toothpies Part II: Elasticity Graphs Directions: Below create a graph for each of the Demand Schedules then label the graphs as Elastic, Inelastic, or Unitary Elastic L CEMENT ICE CREAM [ ice) lan 50, 20 40 22 30, 24 20 26 10 28 GRAPH ~_GRAPH GRAPH Elastic, b ic, Inelastic, or Unitary ElasticPart Il: Calculating Elasticity 1. An Elasticity of 1.0 of greater=___ demand 2. An Elasticity of exactly 1.0 _ demand 3. An Elasticity of between 0 and 1.0 demand Use the Elasticity formula to calculate values of Elasticity forall the situations below. Change negatives to positives STEP 1: ‘alculate the % change in quantity demanded - %AQ [QDemand2 (New) - QDemand2(Original)] / QDemand (Original) STEP 2; Calculate the % change in price - %AP [Price2 (New) ~ Pricel(Original)] / Pricel (Original) STEP 3: Calculate the price elasticity of demand - %AQ / %AP % Change in Quantity Demanded (STEP 1) / % Change in Price (STEP 2) Quantity STEP STEP2 STEP3__| Original | New Q i % ChangeinQ — | % Change in Price | Elasticity Q(Q1)_| (Q2) Price (P1) | Price (P2) Caleulation 28 30 100 40 40 70 120 90 IV. Caleulating Elasticity from Demand Schedules As seen above, in order to calculate elasticity all you need is price points and quantity demanded. This information is listed in any demand schedule. Choose any two price points and quantities in order to calculate elasticity for that price change. However, remember that elasticity changes throughout the demand curve, so you are only calculating for that specific price change. Directions: Use the information from the Demand Schedules below to calculate elasticity for each product. Use the highlighted prices and quantities for your calculation. SHOW YOUR WORK! CEMENT ICE CREAM SHELL FISH/oz a Spy Quantiy) | [geneetora] @ “shellfish (per | a ist 1b) 20 10 Pi-5 | P2- 2.50 1.25 202 1. Cement Price Elasticity of Demand: _ (Calculation) + _ __ (Elastic, Inelastic, Unitary) 2. Ice Cream Price Elasticity of Demand (Calculation) + - (Elastic, Inelastic, Unitary) 3. Shellfish Prices Elasticity of Demand: __(Calculation) + (Elastic, Inelastic, Unitary)Name: Date: Per: PRICE ELASTICITY OF DEMAND WORKSHEET 2 Directions: Complete the following price elasticity of demand practice problems. Remember to SHOW YOUR WORK on all calculation problems. 1. For each of the following pairs of goods, circle which good you expect to have higher price elasticity of demand and why. a) Required textbooks or mystery novels. Explanation: b) Beethoven recordings or classical music recordings in general Explanation: ©) Gasoline during the next six months or gasoline during the next five years. Explanation: 2. Suppose vacationers and business travelers have the following demand for airline tickets from New York to Boston ‘Quantity Demanded (Business Quantity Demanded Price Travelers) (Vacationers) 150 2100 1000 200 2000 800 250 1900 600 300 1800 400 ‘As the price of tickets drops from $250 to $200, caleulate the price elasticity of demand for business travelers and the price elasticity of demand for vacationers? a) Business Travelors; Blasite, Inelastic or Unitary? b) Vactioners:___Elastic, Inelastic or Unitary? Why might vacationers have a different ele icity than business travelers? 3. Two drivers - Tom and Jerry - each drive up to a gas station. Before looking at the price, each places an order. Tom says, "I'd like 10 gallons of gas.” Jerry says, "I'd like $10.00 of gas.” What is each driver's price clasticity of demand? a. Tom: Why? b. Jerry: Why?4. Consider a new Public Policy aimed at healthy eating a) Studies indicate that the price elasticity of demand for potato chips is about 1.0 If a bag of potato chips currently costs $1.00 and the government wants to reduce potato chip consumption by 20 percent, by how much should it tax (increase price) the product? Why? »b) Ifthe government permanently increases the price of potato chips (through a taxes), how will the price change affect the price elasticity for potato chips over time? Explain, ©) Studies also find that teenagers have a higher price elasticity of demand on potato chips than do adults. Why might this be true? 5. Suppose two consumers have the following demand for cigarettes (measured in cigarettes per week): Price QDemanded (Consumer A) QDemanded (Consumer B) $2.00 154 210 2.50 147 175 3.00 140 140 3.50 133 105 Jerry is 16 years old and is experimenting with cigarettes. Jerry’s not addicted yet, but when he doesn’t have anything better to do, he enjoys getting with friends and smoking. Aunt Betty has been smoking for years. She doesn’t really enjoy smoking anymore, but she’s addicted and has trouble stopping. According to your knowledge of elasticity, who is probably Consumer A and who is probably Consumer B Consumer A: _ Why? Consumer B Why? 6. You friend Jenny owns a Bagel shop. She has noticed that when she changes prices she sees a change in the amount she sells. You think to yourself, as an awesome Econ student, “duh, that’s the law of demand.” Since, she knows that you are a smart student she poses the following plan to you. She says that when she reduces her prices on bagels from $5.00 to $4.00 she increases her sales from 100 bagels a day to 300 bagels a day. That’s a lot more bagels sold. She wants to sell a lot of bagels so she thinks well why don’t test out different prices. So she lowers the price again from $4.00 to $3.00 and sells 500 bagels, Then she lowers the price again from $3.00 to $2.00 and sells 700 bagels. Finally she lowers the price from $2.00 to $1.00 and sells 1000 bagels. “Great” she says and is thrilled about selling 1000 bagels a day. You tell her “hold your horses Jenny” this is not a good thing. Explain to Jenny the following: a) Her total revenue at $4.00: b) Her total revenue at $1.00; ©) The best price for her to maximize total revenue: d) How does her elasticity of demand changed as she decreased her prices: a. Elasticity at $4.00: b. Elasticity at $3.00: c, Elasticity at $2.00 d. Elasticity at $1.00 ¢) Why is does the prices elasticity of demand decrease as she drops prices?V. Changing Elasticity of Demand Curves Although it may seems like the elasticity of an item should stay the same since the demand curves and schedules we have been looking at have shown constant inverse relationships ($1 inerease in price leads to 5 Jess sold or any other constant relationship). However, since the equation for elasticity involves percentage changes, the math becomes a bit more complex. To illustrate this changing elasticity along the demand curve, ‘we are going to calculate 3 different elasticities along the same demand curve. Mid Point 22.5 225 D 20 250 E 15 300 F 10 350 Directions: Step 1 - Graph the demand schedule = Step 2 - Calculate the elasticities for the following movements along the curve (aka price changes) below: ADB __ (calculation) + (clastic, inelastic, unitary elastic) BOC _ (calculation) + (clastic, inelastic, unitary elastic) DIE (caleulation) + (clastic, inelastic, unitary elastic) ESF___(caleulation) + (clastic, inelastic, unitary elastic) Step 3 — Label sections of the demand curve (elastic, inelastic, and unitary elastic)VI. Total Revenue and Demand Elasticity As discussed in lecture, producers care about elasticity because it reflects to how much price changes will change affect how much of their product will be sold and ultimately how much money they will take in — aka total revenue. Additionally, we discovered that total revenue increases during price changes in the elastic segments of the demand curve (higher prices) and decreasgs in the inelastic segments of the demand curve (lower prices). Directions 1. Calculate the Total Revenue for each price point. 2. Label whether movement to each price point (A>B, BC, ect) results in an Increase or Decrease in Total Revenue 3. Elastic, Inelastic, or Unitary based on your Total Revenue observations \|roraiiRevenue 35. 100 3500 NA 8 30 150 c 25 = 200 cs Mid Point 22.5 225 D 20 250 E 15 300 F 10 350