Chapter 4 Section 3 Elasticity of Demand

D E M A N D Objectives: Explain how to calculate elasticity of demand. Identify factors that affect elasticity. Explain how firms use elasticity and revenue to make decisions.

Group Work Comp. Sub. Ind. Good Toothpaste Computers Pencil Coffee Dishwashing Soap Chalk Board Bicycle

Section 1 Review/Quiz 1. What is Demand? 2. What is the Law of Demand? 3. What is the Substitution Effect? 4. What is the Income Effect? 5. Demand Curve is always _____ sloping to the ______! 6. What does the Demand Schedule and Demand Graph show?

Section 2 Review/Quiz What does “Ceteris Paribus” mean? What is the only thing that affects Change in Quantity Demanded? Name the 6 factors that affect Change in Demand. What is a complement? Give an example What is a Substitute? Give an example 6. What is an Independent Good. Example

Section 2 Review/Quiz 1. “all other things held constant” 2. Price 3. Income, Inferior Goods, Consumer Expectations, Population, Consumer Tastes & Advertising, Prices of Related Goods 4. 2 goods bought and used together 5. goods used in place of one another 6. an item that is neither a substitute or complement

D E M A N D Focus: List five products that you as a student could not live without. Second how would your list change if those 5 products increased 10%, in price, then 20%, then 35%, then 50%?

D E M A N D Are there some goods that you would always find money to buy, even if the price were to rise drastically? Are there other goods that you would cut back on, or even stop buying altogether, if the price were to rise just slightly?

D E M A N D Economists describe the way that consumers respond to price changes as elasticity of demand. Elasticity of demand dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls.

D E M A N D Your demand for a good that will keep you buying despite a price increase is inelastic or relatively unresponsive to price change.

D E M A N D INELASTIC Unresponsive to price changes Price Total Revenue Price Total Revenue Arrows move in same directions! Example: Table Salt

D E M A N D IF you buy much less of a good after a small price increase, your demand is ELASTIC A consumer with highly elastic demand for a good is very responsive to price changes. Example: Garden Vegetables

D E M A N D ELASTIC Price Total Revenue Arrows move in opposite direction

D E M A N D UNITARY ELASTIC Describes demand whose elasticity has a proportional change. Price Total Revenue ----- No change in Total Revenue!

D E M A N D

D E M A N D Elastic Demand

D E M A N D Inelastic Demand

D E M A N D Type of Elasticity Change Change in Movement of in Price Expenditure Price/Expenditure Elastic Opposite Inelastic Same Unit Elastic No Change - - - - - - -

D E M A N D Demand of Elasticity Elastic Demand Inelastic Demand When given a change in price causes a relatively larger change in QD. Inelastic Demand When a given change in price causes a relatively smaller change in QD. Unit Elastic When a given change in price causes a proportional change in QD.

D E M A N D Elastic Demand: Price Quantity Total Revenue Original Price: $ 3.00 (2 units) = $ 6.00 New Price: $ 2.00 (4 units) = $ 8.00 Inelastic Demand: New Price: $ 2.00 (2.5 units) = $ 5.00 Unit Elastic: New Price: $ 2.00 (3 units) = $ 6.00

D E M A N D IF YES --- demand tends to be elastic Determinants of Demand Elasticity Can the purchase be delayed??? IF YES --- demand tends to be elastic IF NO --- demand tends to be inelastic Are adequate substitutes available??? Does the purchase use a large portion of income???

D E M A N D Inelastic Demand - - such as Insulin Price QD $ 20 7 units

D E M A N D Elastic Demand – such as garden vegetables Price QD $ 20 3 units $ 15 7 units $ 10 17 units $ 5 25 units

D E M A N D Utility A product’s use or how much satisfaction a person gets out of a product.

D E M A N D Marginal Utility How much MORE a person will get out of adding one more unit of a product.

D E M A N D Diminishing Marginal Utility The satisfaction (or utility) obtained from consuming a good declines as more units of the goods are consumed.