1. When gasoline prices increase, why do so few people change their consumption habits of gasoline? 2. How much of an increase in the price do you think it would take for Americans to significantly change their consumption habits? 3. If the price increased significantly, what other options do people have?

Elasticity of Supply and Demand Essential Question: Why is the demand for some commodities more elastic than others? Why is the supply for some commodities more elastic than others?

Elasticity – a measure of responsiveness that tells how a dependent variable (such as quantity) responds to an independent variable (such as price). The price is the independent variable and the quantity is the dependent variable. In other words, how much will the quantity supplied or the quantity demanded change as the price changes?

Elastic Demand The demand of a commodity is elastic when a small change in price causes a large change in the quantity demanded. A commodity’s demand will be elastic if… 1. It is not a necessity 2. There are readily available substitutes

Inelastic Demand The demand of a commodity is inelastic when a change in price (even a large change in price) only causes a small change in the quantity demanded. A commodity’s demand will be inelastic if… 1. It is very difficult to go without it 2. There are few substitutes

Which one of these demand curves is the most elastic Which one of these demand curves is the most elastic? Which is the least elastic? D D D

Which one of these demand curves is the most elastic Which one of these demand curves is the most elastic? Which is the least elastic? D D D Elastic Unit Elastic Inelastic

Which ones of these goods have elastic demand Which ones of these goods have elastic demand? Which ones have inelastic demand? Fresh Vegetables Chevy Cruze

Unit Elastic Demand The demand of a commodity is unit elastic when a change in price causes a proportional change in quantity demanded. For example, a 5% drop in price would cause a 5% increase in quantity demanded. D

Source: Economics: Private and Public Choice, James D Source: Economics: Private and Public Choice, James D. Gwartney and Richard L. Stroup, eighth edition 1997 http://www.mackinac.org/article.aspx?ID=1247

Elasticity of Supply Video Clip

Elastic Supply The supply of a commodity is elastic when a small change in price causes a large change in the quantity supplied. A commodity’s supply will be elastic if… 1. It can be made quickly and inexpensively 2. The resources needed to make it are readily available

Inelastic Supply The supply of a commodity is inelastic when a change in the price (even a large change in price) only causes a small change in the quantity supplied. A commodity’s supply will be inelastic if… 1. Its production is expensive and difficult 2. Its production requires resources that are not readily available

Which one of these supply curves is the most elastic Which one of these supply curves is the most elastic? Which is the least elastic? S S S

Which one of these supply curves is the most elastic Which one of these supply curves is the most elastic? Which is the least elastic? S S S Elastic Unit Elastic Inelastic

Which one of these goods have elastic supply Which one of these goods have elastic supply? Which ones have inelastic supply?

Unit Elastic Supply The supply of a commodity is unit elastic when a change in price causes a proportional change in quantity supplied. For example, a 5% drop in price would cause a 5% decrease in quantity supplied. S

Why is the supply of 1985 Roger Clemens cards perfectly inelastic? The supply of a commodity is perfectly inelastic when a change in the commodity’s price (even a large change in price) has no impact on the quantity supplied. A commodity’s supply will be perfectly inelastic if… 1. Its supply is fixed 2. No more can be made Why is the supply of 1985 Roger Clemens cards perfectly inelastic?

“Supply & Demand of 1985 Topps Roger Clemens Baseball Cards” Price (in dollars) D Quantity (in thousands)

Quantity (in thousands) “Supply & Demand of 1985 Topps Roger Clemens Baseball Cards” Event: Roger Clemens is Accused of Taking Steroids S Price (in dollars) D Quantity (in thousands)

Quantity (in thousands) “Supply & Demand of 1985 Topps Roger Clemens Baseball Cards” Event: Roger Clemens is Accused of Taking Steroids S Price (in dollars) D1 D2 Quantity (in thousands)

Quantity (in thousands) “Supply & Demand of 1985 Topps Roger Clemens Baseball Cards” Event: Over Two Decades Many Roger Clemens Cards are Lost/Destroyed S Price (in dollars) D Quantity (in thousands)

Quantity (in thousands) “Supply & Demand of 1985 Topps Roger Clemens Baseball Cards” Event: Over Two Decades Many Roger Clemens Cards are Lost/Destroyed S2 S1 Price (in dollars) D Quantity (in thousands)

Why does elasticity matter? In general, price changes in any given market are likely to be greater if both supply and demand are inelastic. The same price changes are likely to be less substantial if both curves are elastic. (Economics: Principles and Practices p. 147)

Summarizer: Name a good/service which has elastic demand and explain why. Name a good/service which has inelastic demand and explain why. Name a good/service which has elastic supply and explain why. Name a good/service which has inelastic supply and explain why.