Price Elasticity And Supply And Demand

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Associate Level Material
Appendix B

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 |Oil |Supply (left)---Oil refineries and |Price will increase and quantity will |
| | |equipment is damaged |decrease |
|Cost of cotton decreases |Retail |Supply (right)---increase in |Quantity increases and the price |
| |Textile companies |competitors entering the market |decreases |
|Technology improves efficiency in |Pasta |Supply (right)---increase in new |Quantity increases and the price |
|pasta manufacturing | |technology |decreases |

1. What do substitutes refer to in economics? Give an example of two substitutes.

In economics, substitutes refer to goods that are purchased in a larger quantity when a different good becomes more expensive. An example of a substitute good is cars. When the economy took a turn for the worse and gas prices were hiked up, people started buying smaller cars that were cheaper for gas. Therefore, the smaller or hybrid cars were substituted for the trucks or SUVs.

2. Define “Price Elasticity of Demand.” Give an example. “Price Elasticity of Demand measures how much the quantity demanded responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price” (Mankiw, 2007). For example, if the quantity demanded for a good increases 20% in response to a 10% increase in price, the price elasticity of demand would be 20% / 10%=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
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