DO NOW!! Imagine Mcdonalds doubled its prices… Would people still buy mcdonalds? Why or why not? Now a cancer pharmaceutical company doubled its prices… how might that differ from Mcdonalds?

How do price, income, and other factors affect buying/selling? Elasticity How do price, income, and other factors affect buying/selling?

Price Elasticity of Demand Price Elasticity of Demand: sensitivity of consumers to changes in price Elastic: highly sensitive Inelastic: not very sensitive Ed = % change in Qd % change in P  Take Absolute Value of answer…

Price Elasticity of Demand Ed>1 is Elastic ….. Ed <1 is Inelastic Ed = 1 is called Unit Elastic Extreme Cases: P up leads to Qd zero = “Perfectly elastic” P up leads to No change in Qd = “Perfectly Inelastic” Graphed like this…

Total Revenue Test TR = P x Q P up, TR down = elastic P up, TR up = inelastic P up, TR same = Unit Elastic Ex: At P=4, Qd is 8. At P=5, Qd is 7… Is D elastic, inelastic, or Unit Elastic? Ex: For same curve, At P=8, Qd=3. At P=9, Qd = 2… What is elasticity?

DO NOW!! What characteristics of a product do you think make the demand for that product more Elastic or Inelastic? Which might be more elastic: Hardware nails or rubies?

Determinants of Price Elast. (LIST) Luxury vs. necessity Luxury = elastic Income proportion High proportion ($$$$$) = elastic Substitute availability  Many available = Elastic Time period  More time = easier adjust = elastic

More Elastic or Inelastic? Cavity Fillings? Lexus cars? Chewing gum? Socks? Emeralds? Screws? Ketchup?

DO NOW!! Pretend the price of product A rises and as a result, the Qd of product B goes up. What might that mean about Product A and B? If as income goes up, Qd of product A falls. What could that mean about product A?

Price elasticity of Supply Sensitivity of change in Price on Qs Ex: If P up a bit, Qs up a lot = “elastic” Changes over time: Market Period: Immediate period No time to adjust = perfectly inelastic Short Run: fixed factors, work harder Small adjustment = rather inelastic Long run = adjustable = more elastic

Cross-Elasticity of Demand Sensitivity of purchasing a good based on change in P of related good *How many more ties are demanded when P of a dress shirt falls? Exy= % change in Qd of X % change in P of Y Ex: P of shirts goes from 20 to 10, and Qd of ties goes from 1M to 3M… Calculate Cross Elasticity of Demand?

Cross-Elasticity of Demand If Exy is positive = Substitutes If Exy is negative = Compliments If Exy=0  Unrelated or independent * What is the relationship between ties and shirts from our example?

Income Elasticity of Demand Sensitivity of purchasing a good based on change in income *How many more iPhones are demanded when avg income doubles? Ei = % change in Qd % change in income If positive = Normal Good If Negative = Inferior good