Elasticity of Demand How will consumers increase or decrease the quantity demanded for a good when its price increases or decreases.

How do you react to changes in price? Can it determine what you eat for lunch? What magazines or books you read? What clothing you buy? How much driving that you do?

Elasticity Simply Stated Elasticity is a measure of responsiveness. What is the extent to which consumers will respond to a change in price. Why is this important?

The Definition of Economics Remember that Economics is how people seek to satisfy their needs and wants and That that most people have limited resources (funds) to do this with. Therefore they are forced to make choices, choices that have an opportunity cost in what they do not buy. If a price increases, the opportunity cost of a decision increases.

Think about it… You run a company that produces toothpaste. You want to generate additional revenue to cover increased labor and other costs. So you plan to increase your cost by 5% or 35cents. What could go wrong?

BART When BART increased its fare recently they failed to generate the additional revenue that they needed. Why?

The Result BART is intended to reduce traffic congestion and pollution. When the price increased many commuters simply started driving to work. Was the resulting costs in traffic and pollution worth the minimal increase in revenue.

The Village Voice In New York City, the Village Voice increased their purchase price to $1.00 but the drop off in readership resulted in a loss of advertising. Why? The paper lost so many readers and advertising revenue that rather than reduce the price it started giving its paper away free in the city.

Inelastic goods Sometimes consumers will continue to purchase a good regardless of increases in price. We call these goods inelastic. Can you think of any inelastic goods? Inelastic goods frequently are needs such as food, water, and heating fuel.

Importance of Price Elasticity varies at every price level. If I publish a newspaper that sells for 25 cents, a 20% increase to 30cents might not result in any loss in sales.

Importance of Price A magazine that sells for $3.50 a copy might find that only a 10% increase to $3.85 will result in a decline in sales.

Factors Affecting Elasticity Availability of substitutes Relative importance Necessities versus luxuries Change over time

Availability of substitutes Every morning you eat a bowl of your favorite cereal. Unfortunately, when you go to Safeway to find the price has increased.

Sugar Pops and Price If the increase is only 25 cents you might still purchase a box. How would you react if the increase is $1.00? What choices do you have?

Other substitutes Sometimes it is easy to find a substitute good when prices increase. Instead of buying diet Coke you might buy….

Albertson’s Diet Cola

Relative importance If the price increase is for a good that you already spend a significant amount on, the increase will force you to make some difficult choices.

An increases in the price of shoe laces, paperclips, pencils will have little impact on a family’s economics (seeking to satisfy their needs and wants)

But as the price of gas continues to increase, families are being forced to reconsider their economics (how they satisfy their needs and wants)

Necessity versus Luxuries While this varies from person to person, how important this good is to an individual will determine its elasticity.

Senior Citizens Why is the issue of free prescription drugs so important to senior citizens? Seniors frequently take several different types of prescriptions

A difficult choice Many retired individuals also live on a fixed income Increases in the cost of prescriptions force them to choose between their health and other needs or wants.

The result…. In the end they will purchase the medication they need at a cost of things that that might only have “wanted”. Or they might try to stretch their medication reducing the frequency of how often they take it.

AZT What is AZT AZT can easily cost $1,000 per month Why is demand for this good inelastic? Is it moral to change so much for this good? The estimated annual profit from sales of AZT exceed $100 million

Change over time Sometimes consumers are unable to react quickly to price changes. Think about it, if you own a SUV, the price of that SUV includes the cost of operating it. What has happened to the price? How might this affect your future spending?

You might rethink your next car purchase

Elasticity and Revenue The law of demand states that increases in price decrease the quantity demanded. Before increasing prices a firm must consider what the result will be.

DLS Last year DLS increased its tuition significantly. Why didn’t enrollment at DLS decrease?

DLS Since DLS typically receives an excess in applications, there was no problem in taking in 260 new freshmen. Sometimes if there is excess demand for a good or service, a price increase will result in the increase in revenue desired.

Tuition is in fact Elastic The school recognized that for some families already enrolled the increase could be a problem so financial aid was increased by almost $200,000. How significant is the tuition paid to DLS to your family?

The Magic Formula The elasticity of any good is measured by the percentage change in the quantity demanded divided by the percentage increase in price.

Transportation Tickets & Fares From Port Jefferson To Penn StationPort JeffersonPenn Station Ticket TypesAmount Peak One-Way$12.25Peak One-Way Off-Peak One Way$8.25Off-Peak One Way Weekly$81.00Weekly Monthly$252.00Monthly Sr. Cit./Disabled One Way$6.00Sr. Cit./Disabled One Way Off-Peak 10-trip$70.50Off-Peak 10-trip Ten Trip Senior/Disabled$60.00Ten Trip Senior/Disabled Ten Trip Peak$122.50Ten Trip Peak On-Board One Way Peak$15.00On-Board One Way Peak On-Board One Way Off Peak$11.00On-Board One Way Off Peak CityTicket - Weekends OnlyN/ACityTicket - Weekends Only

A 20% increase in the cost of a monthly ticket will cost you over $ If you make $50,000 a year, this might not be a major consideration but if you make only $20,000 the additional $600 per year in transportation cost will impact you greatly.

How “fast” is elasticity of demand? Think about it, you are at Safeway and notice apples are on sale so you place some in you cart. Next you go to purchase ketchup but you do not want to pay the added “cost” of supporting Kerry so you buy Hunts instead of Heinz. Finally you go you go to the meat dept to purchase steak. You see that there are “no specials” on steak so you buy chicken. You buy some Dannon which costs the same as usual but you realize the container looks a little smaller. On you way to the check out you place a pack of Tic Tacs in you cart without even checking the price.