Elasticity Survey Decide if you would purchase each of these items at the indicated price. If yes, raise your hand when told to do so. Keep track of the survey results as they are written on the board. When the “New Price” is revealed, decide if you would pay this new price and raise your hand when told to do so. Go to the Survey

Coefficient of Elasticity Elasticity Survey Original Price Original Demand New Price New Demand Coefficient of Elasticity Large Pizza $10 Smart Phone $500 Vacation to Europe $5,000 Ask students to raise their hands if they would be willing to pay $10 for their favorite pizza. Count the number of hands that are raised and write this number down in the first cell in the “Original Demand” column. Then perform the same survey for paying $500 for the Smart Phone and $5,000 for the Vacation to Europe. (If you are projecting the slideshow onto a whiteboard or SmartBoard, simply write the values on the screen. Otherwise, create a similar table nearby on the board.) Repeat Survey at the New Price

Elasticity Survey Original Price Original Demand New Price New Demand Coefficient of Elasticity Large Pizza $10 Smart Phone $500 Vacation to Europe $5,000 $15 $750 $2,500 Now, perform the survey again using the new prices. Notice that the first two prices increased by 50% and the third price decreased by 50%. Write the survey results in the proper cells in the “New Demand” column. Calculate the Coefficient of Elasticity

(New Demand - Original Demand) / (Original Demand) Elasticity Survey Original Price Original Demand New Price New Demand Coefficient of Elasticity Large Pizza $10 Smart Phone $500 Vacation to Europe $5,000 $15 $750 $2,500 Use this formula to show students how to compute the values for the the final column. Feel free to refer to this data for illustrative purposes as you go through the lecture. Calculate the “Coefficient of Elasticity” using this formula. (The denominator for all three is 50%.) % change in demand % change in price (New Demand - Original Demand) / (Original Demand) 0.5

“Elasticity of Demand” Targets Knowledge Understand the difference between elastic and inelastic demand. Reasoning Determine whether items are elastic or inelastic using the determinants of elasticity. Skill Use formulas to calculate the price elasticity of demand, the cross-price elasticity of demand, and the income elasticity of demand.

The Price Elasticity of Demand The elasticity of demand measures how much the quantity demanded will change when other factors change.

The Price Elasticity of Demand The elasticity of demand measures how much the quantity demanded will change when other factors change. 1) Price elasticity of demand measures how sensitive consumers are to a change in price. In the opening activity, we measured how sensitive you were to changes in price.

The Price Elasticity of Demand The elasticity of demand measures how much the quantity demanded will change when other factors change. 1) Price elasticity of demand measures how sensitive consumers are to a change in price. 2) Elastic demand means consumers are sensitive to a change in price. Consumers are highly sensitive to a change in price for a meal at a sit-down restaurant. They will consume much less even if the price rises just a little.

The Price Elasticity of Demand The elasticity of demand measures how much the quantity demanded will change when other factors change. 1) Price elasticity of demand measures how sensitive consumers are to a change in price. 2) Elastic demand means consumers are sensitive to a change in price. 3) Inelastic demand means consumers are not sensitive to a change in price. Consumers are not sensitive to a change in price for gasoline. They will consume only a little less even if the price rises a lot.

The Price Elasticity of Demand The elasticity of demand measures how much the quantity demanded will change when other factors change. 1) Price elasticity of demand measures how sensitive consumers are to a change in price. 2) Elastic demand means consumers are sensitive to a change in price. 3) Inelastic demand means consumers are not sensitive to a change in price. % change in quantity % change in price Price elasticity of demand 4) Elasticity equals the percent change in quantity demanded divided by the percent change in price.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. There are other factors that can contribute to item’s elasticity. Only four have been included here for simplicity. Determinants of elasticity not included are: 1) Transaction costs - if there is a high cost of switching to a substitute product, then demand is inelastic. 2) Addictive level of item - items such as cigarettes are addictive and, therefore, inelastic. 3) Breadth of definition of the item - if defining a market broadly, such as the market for food, the item is inelastic. As the market gets more specific, such as whole grain cereal, the item becomes much more elastic.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. Pizza restaurants have many competitors and, thus, many substitutes. If one chain raises their prices, consumers can easily find a substitute.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. For most people, airline travel is extremely costly. Although flying has few substitutes, many people will simply choose not to travel if prices are too high.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. C) The item is a luxury. Food in general is a very inelastic item. When discussing the market for restaurant food, however, the good is considered a luxury and is thus elastic.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. C) The item is a luxury. D) Consumers have a lot of time to adjust to a change in price. Gasoline is inelastic in the short run but is elastic in the long run. This is because consumers will find alternative fuels and adjust their habits if given time.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. C) The item is a luxury. D) Consumers have a lot of time to adjust to a change in price. 2) Items Are Inelastic If… A) Substitutes are hard to find or may not exist. Electricity is a necessary good for most people. If the price of electricity increases, we may complain about it, but we will certainly pay it.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. C) The item is a luxury. D) Consumers have a lot of time to adjust to a change in price. 2) Items Are Inelastic If… A) Substitutes are hard to find or may not exist. B) The item is a small portion of a person’s income. A cup of coffee generally costs very little. Thus, even large percentage increases in price may go largely unnoticed by the consumer.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. C) The item is a luxury. D) Consumers have a lot of time to adjust to a change in price. 2) Items Are Inelastic If… A) Substitutes are hard to find or may not exist. B) The item is a small portion of a person’s income. Consumers often have little choice about whether or not to take a prescription medication. They will pay almost any price if it means feeling healthy. C) The item is a necessity.

Determinants of Elasticity Several factors help determine whether an item is relatively elastic or inelastic. 1) Items Are Elastic If… A) Substitutes exist and are readily available. B) The item represents a large portion of a person’s income. C) The item is a luxury. D) Consumers have a lot of time to adjust to a change in price. 2) Items Are Inelastic If… A) Substitutes are hard to find or may not exist. Notice that gasoline can be considered both elastic or inelastic depending on the time frame being discussed. Most items are more inelastic in the short run and more elastic in the long run. B) The item is a small portion of a person’s income. Consumers may be able to find alternative fuels and adjust their habits in the long run, but they are not sensitive to increases in gas prices in the short run. C) The item is a necessity. D) Consumers have little time to adjust to a change in price.