Changes

'''''Question''''': what does the price in a graph of the supply curve really represent?  The price for a supply curve is the '''''market price for the sale of his goods or services'''''.  When that '''''market''''' price increases, the supplier will produce more of his good (or provide more of his services).  For example, as the salaries of professional baseball players for their services have increased in the major leagues, more and more people have tried to become professional baseball players to benefit from the higher prices paid for the services.  The more profitable that the sale of a good becomes, the more of that good that people want to produce (or, in the case of baseball, the more of that service that players want to provide).

'''''Question''''': what does the price in a graph of the supply curve really represent?  The price for a supply curve is the '''''market price for the sale of his goods or services'''''.  When that '''''market''''' price increases, the supplier will produce more of his good (or provide more of his services).  For example, as the salaries of professional baseball players for their services have increased in the major leagues, more and more people have tried to become professional baseball players to benefit from the higher prices paid for the services.  The more profitable that the sale of a good becomes, the more of that good that people want to produce (or, in the case of baseball, the more of that service that players want to provide).

Let's take another example.  If the market price of oil is low, as in only $10 a barrel, then there is no incentive to increase the production of oil.  No one is going to want to drill for new oil wells.  It's not worth it.  It's not profitable enough.  But as the market price of oil increases to $100 a barrel, then there is much more profit to be made by producing more oil.  Companies drill many new oil wells in order to sell at the high price and make more profits.  The supply of oil increases as its market price increases.

Let's take another example.  If the market price of oil is low, as in only $10 a barrel, then there is no incentive to increase the production of oil.  No one is going to want to drill for new oil wells.  It's not worth it.  It's not profitable enough.  But as the market price of oil increases to $100 a barrel, then there is much more profit to be made by producing more oil.  So companies will drill many new oil wells in order to sell at the high price and make more profits.  The supply of oil increases as its market price increases.

This is the '''''Law of Supply''''':  as the market price for a good increases, the quantity supplied will increase.  This is because as the market price increases, there is an incentive to supply more of the good or service to the market.  This is why the supply curve is '''''upward sloping''''' on a graph of price and quantity.

This is the '''''Law of Supply''''':  as the market price for a good increases, the quantity supplied will increase.  This is because as the market price increases, there is an incentive to supply more of the good or service to the market.  This is why the supply curve is '''''upward sloping''''' on a graph of price and quantity.

Our "force" is a change in price, and our "rubber band" is the demand by the public for the good.  The "price elasticity of demand" of the good is the change in demand for the good in response to a change in price.  Does an increase in price for the good cause a large decrease in demand?  If so, then it has high elasticity.  But if an increase in price for the good does not cause much change in demand, then it has low elasticity.

Our "force" is a change in price, and our "rubber band" is the demand by the public for the good.  The "price elasticity of demand" of the good is the change in demand for the good in response to a change in price.  Does an increase in price for the good cause a large decrease in demand?  If so, then it has high elasticity.  But if an increase in price for the good does not cause much change in demand, then it has low elasticity.

Specifically, the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.  It is usually negative but the sign is dropped so that price elasticity is always a positive number.

Specifically, the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.  Because it is always negative, the sign is dropped so that price elasticity is always a positive number.  For example, "-1/3" in price elasticity of demand is called "1/3" without the negative sign.

Let’s take an example.  Suppose the local NFL (football) team wants to make even more profit than it does already.  The owner decides to increase the ticket prices by 20% for next season.  Because watching football is an obsession for many fans, most are likely to pay the higher prices anyway.  Maybe only 5% will choose not to buy.  The quantity demanded changed little despite a large increase in price.  This means the elasticity of demand is low.  To be precise, it is the percentage change in quantity demanded divided by the percentage change in price: -5%/20% = -1/4.  The sign is dropped so the elasticity is expressed as “1/4”.  This low elasticity encourages the supplier (the football team owner) to repeatedly increase the price.  Low elasticity is described as an “inelastic demand” by economists.

Let’s take an example.  Suppose an NFL (football) team owner wants to make even more profit than it does already.  So the owner decides to increase the ticket prices by 20% for next season.  Because attending football games is an obsession for certain fans, they are likely to pay the higher prices in order to continue attending.  Perhaps only 5% of these fans will choose not to buy.  The quantity demanded changed little despite a large increase in price.  This means the elasticity of demand is low.  To be precise, it is the percentage change in quantity demanded divided by the percentage change in price: -5%/20% = -1/4.  The sign is dropped so the elasticity is expressed as “1/4”.  This low elasticity encourages the supplier (the football team owner) to repeatedly increase the price.  Low elasticity is described as an “inelastic demand” by economists.

How much more revenue does the team make by increasing the price?  Revenue is price times quantity.  If its original price was P and its original quantity Q, then initial revenue is PxQ, or PQ.  After the price increase, the revenue is (1.20 x P) x (.95 x Q) = 1.14PQ.  Revenue has thus increase 14% simply by increasing the price.  That explains why ticket prices for professional sports keep increasing, and why the luxury boxes are so expensive.  The price elasticity of demand for professional sports (particularly football and baseball) is low.  The fans still want to watch, no matter how expensive it gets.  Of course, a higher price does cause some decrease in demand, just not much of a decrease.

How much more revenue does the team make by increasing the price?  Revenue is price times quantity.  If its original price was P and its original quantity Q, then initial revenue is PxQ, or PQ.  After the price increase, the revenue is (1.20 x P) x (.95 x Q) = 1.14PQ.  Revenue has thus increase 14% simply by increasing the price.  That explains why ticket prices for professional sports keep increasing, and why the luxury boxes are so expensive.  The price elasticity of demand for professional sports (particularly football and baseball) is low.  The fans still want to watch, no matter how expensive it gets.  Of course, a higher price does cause some decrease in demand, just not much of a decrease.

Read and, if necessary, reread the above lecture.  Complete the homework assignments through the level at which you choose to enroll in this course:

Read and, if necessary, reread the above lecture.  Complete the homework assignments through the level at which you choose to enroll in this course:

1. Give an example of a good that has a large price elasticity, meaning that a small decrease in price causes a big increase in demand.

1. What is a substitute for french fries, and what is a complement for them?

2. Explain the  concept of income elasticity.

2. Give an example of a good that has a large price elasticity, meaning that a small decrease in price causes a big increase in demand.

3. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape.

3. Explain the  concept of income elasticity.

4. '''''Why''''' is the name "necessity" given to a good that has an income elasticity of less than one, and the name "luxury" given to a good that has an income elasticity of more than one?

4. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape.

5. What is a substitute for french fries, and what is a complement for them?

5. '''''Why''''' is the name "necessity" given to a good that has an income elasticity of less than one, and the name "luxury" given to a good that has an income elasticity of more than one?

6.  Give an example of a "normal" good, and an example of an "inferior" good.

6.  Give an example of a "normal" good, and an example of an "inferior" good.

12.  Describe and discuss how wealth is created in society.

12.  Describe and discuss how wealth is created in society.

 

[[Category:Economics lectures]]

[[Category:Economics lectures]]

{{DEFAULTSORT: Economics Lecture 03}}

{{DEFAULTSORT: Economics Lecture 03}}