How sensitive is demand? Elasticity of Demand How sensitive is demand?

Slope of a Demand Curve What does slope indicate about a product? Do all demand Curves have the same slope? Demand Curves

Slope of Demand Curve Indicates the responsiveness of Quantity Demanded to a change in Price. If the price of a good increases 20% => how much does QTY demand decrease?

Elastic Goods Elastic demand curves are flat Sensitive to price changes A ↑ Price leads to a greater ↓ in Qty Demanded D1 Px Qty

Inelastic Goods Inelastic goods are NOT sensitive to price changes % Change in Price leads to a Smaller % change in Qty Demanded

Inelastic Goods Inelastic demand curves are steep Px Qty Inelastic demand curves are steep Not Sensitive to price changes A ↑ Price leads to a smaller ↓ in Qty Demanded

Elasticity depends on: # of close substitutes Necessity Proportion of income spent Time period

Price Elastic or Price Inelastic? Gasoline Soda Price Inelastic No real substitutes Price Elastic Many substitutes Heart Surgery Table Salt Price Inelastic Necessity & No real substitutes, Short time period Price Inelastic Small proportion of income, no good substitute

Elastic Goods Inelastic Goods

Why does a business Care? Total Revenue Price * Quantity = Total Revenue Elasticity determines the effect on total revenue

Total Revenue & Inelastic Demand Price $6 to $10; Quantity Demanded goes from 8 to 6

Total Revenue & Elastic Demand Bus fare $1.00 to $1.50; Quantity Demanded from 50 to 20

Total Revenue - Total Expenses = Profit

What you need to know! More elastic demand curves are flat Elastic means Qty D is sensitive to Px Changes Total Revenue => Prices elastic goods Total Revenue => Prices inelastic goods

Elasticity of Demand Practice Problems PROBLEM #1 Consider the degree of elasticity of demand for hard candy. Draw the Demand Curve for hard candy with your best educated guess about the proper slope for its elasticity/inelasticity. Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$2 per pound Qty Demanded=1000 pounds Now, imagine that Candy Manufacturers raise the price of a pound of candy from $2/pound to $4/pound; locate the new point on the demand curve that shows the quantity demanded at $4 per pound. With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

PROBLEM #2 Consider the degree of elasticity of demand for gasoline.Draw the Demand Curve for gasoline with your best educated guess about the proper slope for its elasticity/inelasticity. Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$3 per gallon Qty Demanded=gallons Now, imagine that Oil Manufacturers raise the price of a gallon of gasoline from $3/gallon to $5/gallon; locate the new point on the demand curve that shows the quantity demanded at $5/gallon. With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

ELASTIC DEMAND INELASTIC DEMAND

Total Revenue & Inelastic Demand . Price increases from $6 to $10 Total Revenue increases from A to B A = $10 * 18 = $180 B = $6 * 20 = $120 $10 $6 D1 18 20

Total Revenue & Elastic Demand Price D1 Quantity

Elastic Goods Elastic goods have demand which is very sensitive to price changes A % Change in Price leads to a greater % change in Qty Demanded.

Inelastic Demand Curve PRICE Quantity

Elastic Demand Curve PRICE Quantity

Inelastic or Elastic? Gasoline Soda Heart Surgery Table Salt

Total Revenue & Inelastic Demand $10 $6 D1