Many slides taken and/or adapted from bized.co.uk Intro to Elasticity Many slides taken and/or adapted from bized.co.uk

Elasticity The responsiveness of one variable to changes in another Or…Responsiveness or sensitivity of consumers to a price change

PED Price Elasticity of Demand DEFINITION: The responsiveness of demand to changes in price PED helps us understand this: If the price rises by 10%, will demand decrease by more than, less than, or exactly 10%? ELASTIC OR INELASTIC?: Where % change in demand is greater than % change in price ELASTIC OR INELASTIC? Where % change in demand is less than % change in price

Which one of these shows an INELASTIC demand? Why?

Factors that Determine Demand Short-Term Elasticity 1. Substitutability Are there adequate substitutes available? 2. Proportion of Income Does the purchase use a large portion of income? 3. Luxuries v. Necessities Can the purchase be delayed? (Long-Term Elasticity) -- Time Have consumers had time to adjust to a change in prices? (Short term—people stuck w/their cars…long term—people buy what kind of cars?) Estimate the elasticity of a…

What type of elasticity do you think the following would have? Salt Orange juice Stamps Gasoline In general From a particular station Water Baby Food Tobacco Insulin butter Haircut Lawyer services Heart transplant Schooling at an international school in Guangzhou, China So, in an effort to make more profits a producer may want to raise prices. For which of the above would you advise this action?

Elasticity Price (£) Quantity Demanded The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded. Quantity Demanded

Elasticity Each part of equation  (New-original)/original) The Formula: In Other Words… If answer is between 0 and -1: the relationship is inelastic Each part of equation  (New-original)/original) Exactly zero: perfectly inelastic; Exactly one: unit elastic Less than one: inelastic; More than one: elastic Note: The # is usually negative but is always expressed as a positive

The Bigger the Number, the ____ people respond to the price MORE Over 1.0 = Under 1.0 = Exactly 1.0 = Elastic Inelastic Unit Elastic

Total Revenue What is the definition for revenue? What is the equation for Total Revenue? In the example below, What is the total revenue if the quantity purchased is 90? 50? 20?

Elasticity: “The Revenue Test” If demand is price elastic: Increasing price would reduce TR (%Δ Qd > % Δ P) Reducing price would increase TR If demand is price inelastic: Increasing price would increase TR (%Δ Qd < % Δ P) Reducing price would reduce TR

Elasticity and Total Revenue

Elasticity decrease % Δ Price = -50% % Δ Quantity Demanded = +20% Producer decides to lower price to attract sales 10 % Δ Price = -50% % Δ Quantity Demanded = +20% Ped = -0.4 (Inelastic) 5 The producer should or should not lower the price because total revenue would ________ decrease D 5 6 Quantity Demanded

Elasticity Producer decides to reduce price to increase sales % Δ in Price = - 30% % Δ in Demand = + 300% Ped = - 10 (Elastic) What happens to total revenue? 10 Good move? 7 D 5 20 Quantity Demanded

So…if a firm supplies a product that has an inelastic demand, should it likely raise or lower prices to increase total revenue?

Primary v. Secondary v. Tertiary: the 3 (Main) Sectors of the Economy Characteristics? Examples? Why/When/How do countries move into different sectors?

What is a ‘primary commodity?’ Wheat, oil, copper, rubber, metals, cotton, etc.

Is the PED for… Many primary commodities high or low? Many manufactured products relatively high or low?.

Time permitting…more primary/secondary/tertiary info

Not sure where, but…

3 Countries: USA, Brazil, Nepal

HONG KONG Employment

Tibet 1959 2008

China