Elasticity of Demand Unit 2

Elasticity Elasticity means responsiveness

Elasticity of Demand How responsive the change in quantity demanded is when there is change in price

Equation: Elasticity of Demand % Change in Quantity Demanded % Change in Price

Elastic Demand Significant change in quantity demanded with change in price When Elasticity is >1 Qd Qd P P

Elastic Demand Price Quantity D It’s sleepy

Elastic Examples A non-necessity Good with substitutes Something that represents a big portion of your income

Inelastic Demand Minimal change in quantity demanded with change in price When Elasticity is <1 P Qd P Qd

Inelastic Demand Price Quantity D It looks like an “I”

Inelastic Examples A necessity Good with no substitutes Something that represents a small portion of your income

Unitary Elastic % Change in Quantity Demanded = % Change in Price Elasticity = 1 P Qd = P Qd =

Shifts in Demand Unit 2

Demand Review What is demand? What is the Law of Demand? What makes demand have a downward slope?

Demand Curve Inverse relationship between price and quantity demanded Price Quantity D P Qd P Qd

Change in Quantity Demanded Changes in price cause a change in quantity demanded Illustrated by moving from one point to another on the demand curve

Changes in Demand INCREASE in Demand: people are willing and able to buy MORE of a good AT EVERY PRICE LEVEL DECREASE in Demand: People are willing and able to buy LESS of a good AT EVERY PRICE LEVEL Illustrated by shifting the entire demand curve

Increase in Demand Price D2 D1 Quantity INCREASE in demand shifts in the demand curve to the RIGHT Price Quantity D1

Decrease in Demand Price D1 D2 Quantity DECREASE in demand shifts in the demand curve to the LEFT Price Quantity D1 D2

Why Demand Shifts: Determinants of Demand Income Tastes and Preferences (FADS) Substitute Goods Complementary Goods Weather Number of Buyers Expectations

Income: Inferior vs. Normal Goods Inferior Goods Demand decreases when income increases Demand increases when income decreases Normal Goods Demand increases when income increases Demand decreases when income decreases

Tastes and Preferences Demand increases and decreases with changes in tastes/preferences Fads causes changes in demand Advertising influences consumers’ tastes

Price of Substitute Goods If price of one good increases, the quantity demanded decreases. DEMAND for its SUBSTITUTE INCREASES If price of a good decreases, the quantity demanded increases DEMAND for its SUBSTITUTE DECREASES

Price of Substitute Goods Price of of a Good Increases Quantity Demanded Decreases DEMAND for Substitute Good Increases Price of of a Good Decreases Quantity Demanded Increases DEMAND for Substitute Good Decreases

Price of Complementary Goods If price of one good increases, the quantity demanded decreases. DEMAND for its COMPLEMENT also DECREASES If price of a good decreases, the quantity demanded increases DEMAND for its COMPLEMENT also INCREASES

Price of Complementary Goods Price of of a Good Increases Quantity Demanded Decreases DEMAND for Complementary Good Decreases Price of of a Good Decreases Quantity Demanded Increases DEMAND for Complementary Good Increases

Weather Demand increases and decreases with changes in season/weather Seasonal items

Number of Buyers INCREASE of # of buyers INCREASES demand DECREASE of # of buyers DECREASES demand

Expectations Expectations for future income Demand increases with expected increase in income Demand decreases with expected decrease in income

Expectations Expectations for future prices If you expect prices to increase in the future, demand will increase now If you expect prices to decrease in the future, demand decreases now

Expectations Expectations for what product will do for you If product will be good for you, demand increases If product will be bad for you, demand decreases