Elasticity When the price of an item changes, the change in demand or supply can vary a little or a lot.

Standard Correlation o SSEMI3 The student will explain how markets, prices, and competition influence economic behavior. c. Define price elasticity of demand and supply. c. Define price elasticity of demand and supply.

Demand Elasticity The amount that quantity demanded changes with a change in price – price effect The amount that quantity demanded changes with a change in price – price effect Indicates a buyer’s eagerness to buy a good or service Indicates a buyer’s eagerness to buy a good or service Large price effect = elastic Large price effect = elastic Small price effect = inelastic Small price effect = inelastic

Price Elasticity of Demand for Milk and Cola – an example $3.00 $2.50 $2.00 $1.50 $1.00 $ Demand for cola Demand for Milk

Examples Elastic – Flat screen TV, New cars, expensive items, CDs, designer clothes Inelastic – milk, diapers, gas, tobacco, insulin, prescription drugs Inelastic – steep slope – more vertical P Q P Q Elastic – gradual slope – more horizontal Copy the graphs

Determinants of Demand Elasticity 3 Questions Yes = Elastic No= Inelastic 1.Can the Purchase be delayed?  If consumers can’t postpone purchase it will be inelastic – ex. Toilet paper, eggs, milk  People may react differently if they can buy the items elsewhere for cheaper – they could delay buying them 2. Are Adequate Substitutes Available?  If adequate substitutes are available, consumers can take adv. of the best price – this makes demand elastic 3. Does the Purchase use a large portion of income?  If the amount of income used is large = elastic demand – ex – computers, cars, vacations

Elastic or Inelastic?  Salt  New Cars  Pork Chops  European Vacation  Insulin  Gasoline  Eggs  Tattoos

Elasticity of Supply  Large price effect = elastic supply  Small price effect = inelastic supply  Example: # of chickens provided by chicken producers can increase greatly when the price of chickens goes up. This elastic response happens because ranchers can quickly increase the number of chickens being raised without big increases in marginal costs. A small increase in chicken prices can then bring about a big increase in the number of chickens offered for sale.

Elastic Supply (gradual slope)  Copy Graph Chickens produced Price

Inelastic – Steep slope 40  Copy Graph Stock of Gasoline Price per barrel

Determining Elasticity of Supply  Responsiveness – How easy is it for the company to respond to a change in price?  Quick and Easy Response – Elastic  Inability to Respond (too time consuming and expensive)- Inelastic

Examples  Elastic – DVDs, garden tools, agricultural products, bottled water, cookies  Inelastic – custom made furniture, hand- made quilts, speed-boats, automobiles, electrical energy, gasoline (things that are complex to produce)

Write this down on your notes…  My product is……  Because… (Answer the 3 questions…)