elasticity

 Macro – economic decisions made by a nation or group of people  Micro – economic decisions made by an individual  The law of demand tells us that a change in price will lead to an inverse change in quantity demanded. If gas dropped to 50 cents a gallon…the demand for gas will??? If it goes up to $5….???

 Elasticity – Is a measure of responsiveness of one variable to changes in another variable.  Price Elasticity of Demand – When the price changes, how does the new demand in relationship to the new price. If people are paying more, the demand will drop…but how much?  Price Elasticity of Supply - A direct relationship between price and supply. If people are willing to pay more, more will be supplied.

People that need insulin will buy the same amount of it no matter what the current price. What are other items that tend to have an inelastic demand?

What real world scenarios would be close to this? If two gas stations operate across the street from one another and both sell gas for $2 a gallon. One of them decides to raise its price to $3 a gallon. No one (in their right mind, would choose the higher price) Any rise in price would result in zero demand The seller has no ability to change the selling price

 When Darla increases the price of doughnuts by 10%, the demand for doughnuts drops by 25%.  The Price Elasticity Formula number for this is 2.5 or (25% divided by 10%)  When Stephanie increases her study time by 40% and her grades increase by 10%...the elasticity is 4.0  E D = Percentage Change in Quantity Demanded/Percentage Change in Price E D = the Elasticity of Demand

Change in Quantity Demanded Average Quantity Demanded Change in Price Average Price Price $ Quantity Demanded Based on the demand schedule above, compute the price elasticity of demand for a change in price from: A.$16 to $14 B.$14 to $12 C.$12 to $10 D.$10 to $8 E.$8 to $6 F.$6 to $4

Change in Quantity Demanded Average Quantity Demanded Change in Price Average Price Price $ Quantity Demanded Based on the demand schedule above, compute the price elasticity of demand for a change in price from: A.$14 to $16 B.$14 to $12 C.$12 to $10 D.$10 to $8 E.$8 to $6 F.$6 to $4 a. (10/35)/(2/15)=.2857/.1333=2.14

 A – 2.14  B – 1.44  C - 1  D -.69  E -.47  F -.29

If E D is greater than one, demand is elastic If E D is less than one, demand is inelastic If E D equals one, demand is unitary elastic

A

 The number of substitutes for the good – are there other choices if the price of my product changes. (shopping at Best Buy)  The percentage of a person’s budget spent on the good – The greater the percentage, the more elastic the demand for the good. (candy bars vs. houses)

 The nature of the good; luxury versus necessity – For luxury goods, demand tends to be elastic. (luxury goods are sacrificed)  Time consumers have to respond – The more time consumers have to respond to a price change for a good, the more elastic the demand for the good. (time to shop around and price compare)

 The responsiveness of demand for one good in relationship to the demand for another group.  If the price of gasoline goes up……  The demand for new cars that get poor gas mileage goes down.  The demand for fuel efficient cars goes up.

 Substitute Goods – Benefit from a change in related product. (What is a substitute for butter?)  Complement goods – When a related product is effected, these goods are also effected. (What is a complement good for beef?)  Inferior goods – As income increases, the demand for this good or service decreases. (riding the city bus, buying cheap hamburger meat)

 Buyers bear a greater burden of a tax if demand is inelastic – Cigarettes  Sellers bear a greater burden of a tax if demand is elastic or if supply is inelastic. (If a buyer has more substitutes or if producing more to lower the cost is not possible.)

 The burden of a tax refers to who actually feels the impact of a tax.  If a seller is taxed, then the seller and the buyer will share the burden.  If a buyer is taxed, then the buyer and the seller will share the burden.  Why? H4Yme8I H4Yme8I

PriceQuantity Demanded

Change in Quantity Demanded Average Quantity Demanded Change in Price Average Price Price $ Quantity Demanded Based on the demand schedule above, compute the price elasticity of demand for a change in price from: A.$7 to $6 B.$6 to $5 C.$5 to $4 D.$4 to $3 E.$3 to $2 F.$2 to $1

A – 2.6 B – 1.57 C - 1 D -.64 E -.38 F -.20