Elasticity shows how sensitive Quantity is to Change in Price.

Consumers will buy more when prices go down and less when prices go up THE LAW OF DEMAND SAYS... Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? DOES IT MATTER?

4 Types of Elasticity Elasticity of Demand Elasticity of Supply Cross-Price Elasticity (Substitute or Complement) Income Elasticity (Normal or Inferior)

1. Elasticity of Demand Inelastic Elastic % Δ Q % Δ P Ex. Ex. 20% 5% Price Quantity Price Quantity 20% 5% 35%

Elastic or Inelastic Explain why for each of the following. Salt New Cars Pork Chops European Vacation trip Insulin Insulin at one of four drugstores in a shopping mall.

1. Elasticity of Demand Elastic Inelastic

1. Elasticity of Demand Elastic Inelastic

1. Elasticity of Demand 1 Inelastic Elastic % Δ Q % Δ P Unit Elastic Price Quantity 20% % Δ Q % Δ P Unit Elastic 1 Inelastic Elastic

1. Elasticity of Demand Total Revenue Test Price Inelastic Elastic TR = P x Q Inelastic Elastic Price

Is the range between A and B, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 5 x 225 = $1125 Price Quantity A B Price decreased and TR increased, so… Demand is ELASTIC 10 5 % Δ Q % Δ P 100 225

Is the range between B and A, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 8 x 110 = $880 Price Quantity A B Price increased and TR increased, so… Demand is INELASTIC 10 8 % Δ Q % Δ P 100 110

2. Elasticity of Supply Inelastic Elastic % Δ Q % Δ P Ex. Ex. 20% 5% Price Quantity Price Quantity 20% 5% 35%

2. Elasticity of Supply 1 Inelastic Elastic % Δ Q % Δ P Unit Elastic Price Quantity 20% % Δ Q % Δ P Unit Elastic 1 Inelastic Elastic

Elasticity Coefficient for Demand & Supply | Δ Q | % Δ Q % Δ P (Q1+Q2)/2 = | Δ P | (P1+P2)/2 Price Quantity A B 100 220 15 5 QBig-Qsmall (QBig+Qsmall)/2 PBig-Psmall (PBig+Psmall)/2

Elasticity Coefficient for Demand & Supply QBig-Qsmall (QBig+Qsmall)/2 % Δ Q % Δ P = PBig-Psmall (PBig+Psmall)/2 Price Quantity A B 100 220 15 5 220-100 120 (220+100)/2 160 = 15-5 10 (15+5)/2 10

3. Cross-Price Elasticity Complement Substitute % Δ Q % Δ P B A

3. Cross-Price Elasticity Complement Substitute % Δ Q % Δ P B A Complement Substitute

4. Income Elasticity Inferior Normal % Δ Q % Δ I

4. Income Elasticity Inferior Normal % Δ Q % Δ I Inferior Normal

Elasticity Practice

Elasticity Price 1.25 1.00 0.75 0.50 0.25 Quantity 200 250 300 350 400 The demand for video game tokens at the neighborhood arcade. Using the midpoints formula, between $.50 and $.25 the price elasticity of demand equals______? Suppose that Price = .75 currently. A decrease in price will do what to total revenue?

This demand curve is price elastic from _______ to _______. 10.50 9.50 8.50 7.50 6.50 5.50 4.50 Quantity 220 260 300 340 380 420 460 Demand for prime rib. Using the midpoints formula, this demand curve is unit elastic between _______? This demand curve is price elastic from _______ to _______. Suppose that Price = $6.00, A 3% decrease in quantity demanded would require a ____ increase in price. Suppose that Price = $6.50 currently. A decrease in price will do what to total revenue.

AP Micro Free Response Elasticity FRQ-Assume the following about laptop and desktop computers: The demand for computers is price inelastic Laptop and desktop computers have a cross price elasticity coefficient of +3.6 Computers and DVD burners have a cross price elasticity coefficient of -0.8 All computers have a income elasticity coefficient of +2.3 (a) Using correctly labeled graphs, show the impact of a change in technology that improves only the production of laptop computers on the following: i. Price of laptop computers ii. Output of laptop computers iii. Total revenue of laptop computer producers iv. Price of desktop computers v. Output of desktop computers (b) Using new correctly labeled graph, show the impact of a decrease in price of DVD burners on the following: i. Price of computers ii. Output of computers (c) Using new correctly labeled graphs, show the impact on the following when income increases by 30%: ii. Quantity of computers iii. Price of DVD burners iv. Quantity of DVD burners