Associate Level Material Appendix B (6 points each for all 5 questions) Price Elasticity and Supply & Demand Fill in the matrix below and describe how changes in price or quantity of the goods and services affect either supply or demand and the equilibrium price. Use the graphs from your book and the Tomlinson video tutorials as a tool to help you answer questions about the changes in price and quantity |Event |Market affected by event |Shift in supply, demand, or both. Change in equilibrium | | | |Explain your answer. | | |Frozen orange crops in California |Orange juice |Supply (left)—Not as many available |Price will increase and quantity will | | | |oranges to offer consumers.
|decrease. |Hurricanes in the Gulf Coast |Petroleum Industry |Supply (Left) – Refineries shutting |Price will increase and quantity will | | | |down will decrease the supply of |decrease | | | |gasoline and increase demand from the | | | | |consumers. | |Cost of cotton decreases |Textiles |Supply (right) – There is a decrease in|Price will decrease and quantity will | | | |input cost. |increase. | |Technology improves efficiency in |Pasta |Supply (right) – Technological |Price will decrease and quantity will | |pasta manufacturing | improvement will increase the supply of|increase.
| | | |pasta. | | 1. What do substitutes refer to in economics? Give an example of two substitutes. In Economics, substitutes take the place of another still satisfying the buyer. Buyer makes the choice between the two causing the buyer to choose which one the buyer prefers.
For example, vehicles can be substituted with public transportation.Another example is vehicle freight can substitute train freight. Trains are cheaper but cannot do direct point-to-point delivery like delivery vehicles can. 2. Define “Price Elasticity of Demand. ” Give an example.
The price elasticity of demand is used to measure the responsiveness of quantity demanded to a change in price, with all the other factors kept constant. Price Elasticity of Demand, Ed = Percentage change in quantity demanded Percentage change in priceFor example, if the price of flour goes up by 1%, and as a result sales fall by 2%, the price elasticity of demand for flour is -2%/1% = -2. 3. Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. In your explanation, be sure to include how the necessity of a good and the availability of substitutes affect the price elasticity of demand in each of these specific cases: • Gasoline as a commodity The demand for gasoline as a commodity is price inelastic.
This is because giving up gasoline altogether is much harder.Public transportation or Hybrid vehicles can be substitutes for vehicles powered by gasoline, but it would take time for people to make this transition as majority of vehicle owners are dependent on gasoline. Therefore, an increase in the price of gas would not greatly decrease purchase. • Gasoline sold at a local gasoline station The demand for gasoline sold at a local gasoline station which is of a particular brand is price elastic. At this time, the need and want for a certain brand of gasoline is not like it used to be due to increase in price of the gasoline.People are looking to save money by buying gasoline from the station that has the cheapest price so if the local gas station raises their price, buyers will shop around to fulfill their needs and save some money at the same time.
• Hotel rooms for people planning a vacation The demand for hotel rooms for people planning a vacation is price elastic. The choice of a different hotel can be made if the price of the hotel increases or if it is too expensive for the vacationer. • Hotel rooms for people on business to meet an important clientThe demand for hotel rooms for people on business to meet an important client is price inelastic. The importance of the location of the hotel outweighs the importance of the price.
4. Define the Law of Demand and the Law of Supply. Give an example for each. Law of Demand: The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good.
In other words, the higher the price, the lower the quantity demanded. Example: For example, if the price of bananas drops from $3 to $1. 0, buyers are able to buy twice the amount of bananas for the same price. Therefore, there would be an increase in the demand for bananas when the price lowered. Law of Supply: The Law of Supply states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers’ increases and vice versa. Example: If the price of apples increases from $1 to $2, then the apple supplier would try to produce a higher quantity in the market to make more of a profit.
