Do Now List 2 examples of an elastic good List two examples of an inelastic good Describe why these goods are either elastic or inelastic

Aim: How is elasticity determined? Friday, October 12, 2012

Elastic Elastic – a demand that is very sensitive to price change

Inelastic Inelastic – describes demand that is not sensitive to price change Ex.

Elasticity of Demand Elasticity of demand Measures changes in the quantity demanded when prices change. Some goods are very elastic and others are very inelastic.

How Elasticity is Calculated To predict consumer behavior, economists use well-defined techniques evaluating the sensitivity of consumers to changes in price. British economist Alfred Marshall developed a system for measuring elasticity.

Alfred Marshall’s Calculation According to Marshall’s calculations most goods had an elasticity of demand between .5 and 1.5. A good that is extremely inelastic has an elasticity of demand of 0.1. A good that is extremely elastic has an elasticity of demand of 5.0.

Factors Affecting Elasticity These factors are the number of good substitutes. The degree of necessity. The proportion of a purchaser's budget consumed by the item. The time period involved.

Goods Elasticity of Demand Inelastic   Salt 0.1 Matches Toothpicks Airline travel, short-run Gasoline, short-run 0.2 Gasoline, long-run 0.7 Natural gas, short-run Natural gas, long-run 0.5 Coffee 0.25 Fish (cod) consumed at home Tobacco products, short-run 0.45 Legal services, short-run 0.4 Physician services 0.6 Taxi, short-run Automobiles, long-run Inelastic Goods Quantity demanded is not very sensitive to a change in price.

Unitary Elastic Good Elasticity of Demand Movies 0.9 Housing, owner occupied, long-run 1.2 Shellfish, consumed at home Oysters, consumed at home 1.1 Private education Tires, short-run Magazines 1 Radio and television receivers An increase in price leads to an equal percentage decrease in quantity demanded. Example: Price increase 15% Quantity demanded decreases 15%

Elastic Goods Quantity demanded is very sensitive to price. Good Elasticity of Demand Restaurant meals 2.3 Foreign travel, long-run 4.0 Airline travel, long-run 2.4 Fresh green peas 2.8 Automobiles, short-run 1.2 - 1.5 Chevrolet automobiles Fresh tomatoes 4.6 Quantity demanded is very sensitive to price.