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ECONOMICS FOR THE VIRTUAL ENTERPRISE “The business of America is business.” —Calvin Coolidge Worksheet 5A Exercise 1: Graphing the Demand Curve. Use the data presented in the Demand Schedule for CDs to graph the demand curve in the chart below. Exercise 2: Movement Along The Demand Curve. Answer the following questions based on the demand curve you have graphed: 1. When the price of a CD is $20, what is the quantity demanded by consumers? 2. When the price of a CD is $15, what is the quantity demanded by consumers? 3. When the price of a CD is $11, what is the quantity demanded by consumers? 4. As the price of a CD decreases, does the quantity of CDs demanded increase or decrease? 5. As the price of a CD increases, does the quantity of CDs demanded increase or decrease? Exercise 3: Characterizing the relationship between the change in price and the change in quantity demanded: Lines A and B are depicted in the table below. Line A depicts an inverse relationship between two variables that is characteristic of a demand curve; line B depicts a direct relationship between two variables. Line A Line B y y x x Negative slope: Inverse relationship between x and y variables; when y decreases, x increases. Positive slope: Direct relationship between x and y variables; when y increases, x increases. Demand Schedule For CDs Price per CD (in dollars) Quantity Demanded (in millions) 20 100 19 200 18 300 17 400 16 500 15 600 14 700 13 800 12 900 11 1000 DEMAND CURVE* 20 Price per CD (in dollars) 19 18 17 16 15 14 13 12 11 100 200 300 400 500 600 700 800 900 1000 Quantity Demanded (in millions)

ECONOMICS FOR THE VIRTUAL ENTERPRISE “The business of America is business.” —Calvin Coolidge For each pair of variables below, indicate whether the relationship between them is direct or indirect: Variable 1 (Y) Variable 2 (X) Relationship: Direct or indirect? Years of education Lifetime income Hours spent working out at gym Amount of body fat Hours spent studying for math exam Score on math exam Frequency of hand washing using anti-bacterial soap Incidence of cold and flu symptoms Price of a product Quantity demanded of product

ECONOMICS FOR THE VIRTUAL ENTERPRISE “The business of America is business.” —Calvin Coolidge Worksheet 5B Exercise 1: Shifts in the Demand Curve. In recent years, sales of music CDs have decreased as many consumers have elected to download individual tracks of music directly into their playing devices. Of course, the cost to download a single track is less than the cost of a CD. The demand for music CDs is shown in the demand schedule as D1. Imagine that as a result of pressure from the music industry, music downloads are outlawed, and the only way to purchase music is to buy a music CD. Demand for CDs increases and is now shown in the demand schedule as D2. Demand Schedule for CDs Price per CD Quantity Demanded (D1) Quantity Demanded (D2) 20 100 125 19 200 250 18 300 375 17 400 500 16 500 625 15 600 750 14 700 875 13 800 1000 12 900 1125 11 1000 1250 • Using the data presented in the Demand Schedule for CDs, graph the demand curves D1 and D2 in the chart below. Price per CD 20 19 18 17 16 15 14 13 12 11 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 Quantity Demanded Refer to the chart you have drawn and answer the following questions: 1. When CDs sell for $18, compare the quantity demanded for CDs at demand levels D1 and D2. 2. Explain why more customers are now willing to purchase CDs for the same price. 3. When demand increases at all price levels, the demand curve shifts in which direction: right or left? 4. Explain the difference between an increase in demand and increase in the quantity demanded . a. Which is depicted as a movement along the demand curve? b. Which is depicted as a shift in the demand curve?

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ECONOMICS FOR THE VIRTUAL ENTERPRISE “The business of America is business.” —Calvin Coolidge Worksheet 5C Exercise 1: Identifying the determinants of demand. In worksheet 5B, you have seen have how an increase in demand is depicted on a graph by a shift in the demand curve. • When the demand curve shifts upward and to the right, this is indicative of an increase in demand. • When the demand curve shifts 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: • indicate whether demand will increase or decrease; • provide an explanation as to why. Determinant of demand Demand increases or decreases? Explanation Population increases Population decreases Increase 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 a popular fad (change in taste of buyers) Product now out of fashion (change in taste of buyers) There is an expectation that the price of the product will soon fall There is a fear that the economy will go into a recession where many firms will fail and unemployment will increase Movement along the curve or a shift in the demand curve? Complete the table below by indicating whether each scenario results in a change in the quantity demanded (movement along

ECONOMICS FOR THE VIRTUAL ENTERPRISE “The business of America is business.” —Calvin Coolidge 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 shifts up or down. Scenario Movement or shift up or shift down? 1. There is an outbreak of the flu and sales of latex gloves skyrocket. 2. A nail salon cuts the price it charges for manicures and more clients come. 3. A chain of department stores extends the hours that stores will remain open and total sales for the chain has increased. 4. The US Census Bureau has announced that there is baby boom in the United States and sales of baby carriages have increased. 5. John’s Bicycle shop increases the prices of bicycles and sales decrease. 6. The City of New York has cut the number of city employees by 10% and sales of big screen televisions falls.

ECONOMICS FOR THE VIRTUAL ENTERPRISE “The business of America is business.” —Calvin Coolidge Worksheet 5D Measuring price elasticity of demand using the PEoD formula and the Total Revenue Test. Scenario 1: A local school sells bottled iced tea in the school store. The drink has been so popular with the teachers and students that the store manager decides to raise the price to increase profits. At $1.25 per bottle, the store sold 6,000 bottles per week, after raising the price to $1.50 per bottle, sales decreased to 4,000 bottles per week. I. Using the following formula to calculate the price elasticity of demand (PEoD) for the iced tea: PEoD = (% change in quantity demanded/% change in price) • Based on the formula result, is demand for the iced tea elastic, unitary elastic or inelastic? II. Complete the table below and use the revenue test to determine the price elasticity of demand. Price per Bottle Quantity Sold Total Revenue Week 1 Week 2 • Based on the change in total revenue, is demand for the iced tea elastic, unitary elastic or inelastic? Scenario 2: A private company operates a ferry service that transports commuters from Staten Island to Manhattan in approximately 10 minutes, which is less than half the time it takes for normal ferry service. The company charges $5 per trip and has been serving an average of 6,000 passengers per day. In an attempt to increase profits, the management of the company decides to raise the price of to $6 per trip. After the increase, ridership decreases to an average of 4,000 passengers per day. I. Using the following formula to calculate the price elasticity of demand (PEoD) for the ferry service: PEoD = (% change in quantity demanded/% change in price) • Based on the formula result, is demand for the ferry service elastic, unitary elastic or inelastic? II. Complete the table below and use the revenue test to determine the price elasticity of demand. Price per Ride Quantity Sold Total Revenue Week 1 Week 2 • Based on the change in total revenue, is demand for the ferry service elastic, unitary elastic or inelastic?

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