Elasticity of Demand

When Price , Quantity demanded But, by how much? How much does the price have to go up to get a big or small change in quantity demanded? The answer is…. IT DEPENDS It depends on the price elasticity of the product Elasticity = Measure of sensitivity The extent to which a change in price causes a change in quantity demanded Say to the students-- "You might be saying to yourselves, WHAT DO INSULIN AND BICYCLES HAVE IN COMMON"? PAUSE "How many of you in here know what insulin is used for"?

Insulin and Bicycles I want to talk about two products for the next ten minutes. Insulin and Bicycles Say to the students-- "You might be saying to yourselves, WHAT DO INSULIN AND BICYCLES HAVE IN COMMON"? PAUSE "How many of you in here know what insulin is used for"?

Diabetes Let the students know that you are teaching across the curriculum here. This is the molecule for insulin. molecules

Every morning, millions of diabetics give themselves a shot of insulin just to stay alive. Talk to the students about how difficult it must be to be a diabetic.

over 10 million diabetics, 110 million worldwide. In the U.S., there are over 10 million diabetics, 110 million worldwide. Information about diabetes. (2001)

Now you say to yourself again, so what do insulin and bicycles have in common? Diabetics ride bicycles.

P P $300 $3 $200 $2 $100 $1 D D 10 m Q 100 200 300 Q Insulin Bicycles Would diabetics be willing to pay $1 for a bottle of insulin? How many diabetics would be willing to pay $2 a bottle? All of them. How about $3? All of them. The demand curve for insulin between the prices of $3 and 1 cent is perfectly INELASTIC. For bicycles though, at $300, 100 bicycles would be purchased; at $200, 200 bicycles would be purchased; at $100, 500 bicycles would be purchased. So what happened to DEMAND as the price of bicycles goes down? NOTHING! Something happens to the QUANTITY DEMANDED. The demand curve stays the same. (You are just testing the students’ memory here). Insulin Bicycles

e P INELASTIC P ELASTIC $300 $3 $200 $2 $100 $1 D D 10 m 100 200 300 Q To help the students to remember inelastic and elastic, you can tell them for Inelastic, the demand curve looks like an “I,” Insulin, Inexpensive. For Elastic, the demand curve looks sort of like an “E” (okay, sort of), Expensive, and Bicycles has an “e” in it. Insulin Bicycles Four tests for figuring elasticity of demand: 1. Few substitutes Many substitutes One has few substitutes and one has many? 2. Necessity Luxury One is a necessity and the other is a luxury? 3. Inexpensive Expensive One is expensive and the other is inexpensive

More time = More elastic ELEMENT OF TIME In General, demand is more elastic over longer periods of time. Given enough time, consumers may develop tastes for other products or actively look for & find substitutes which would increase elasticity. More time = More elastic Say to the students-- "You might be saying to yourselves, WHAT DO INSULIN AND BICYCLES HAVE IN COMMON"? PAUSE "How many of you in here know what insulin is used for"?

e P INELASTIC P ELASTIC $300 $3 $200 $2 $100 $1 D D 10 m Q 100 200 300 To help the students to remember inelastic and elastic, you can tell them for Inelastic, the demand curve looks like an “I,” Insulin, Inexpensive. For Elastic, the demand curve looks sort of like an “E” (okay, sort of), Expensive, and Bicycles has an “e” in it. Insulin Bicycles Four tests for figuring elasticity of demand: 4. Less time More time

Why? Pizza Elastic Many substitutes Food Inelastic Sports Cars Elastic I am going to name a product and you let me know if the demand for the product is elastic or inelastic: Elastic or Inelastic? Why? Pizza Elastic Many substitutes Food Inelastic Few substitutes + Necessity Sports Cars Elastic Expensive/Luxury Hamburger Elastic Many substitutes Gasoline Inelastic Few substitutes Cigarettes Inelastic Necessity (addiction) Shelter Inelastic Few substitutes + necessity House Elastic Many Substitutes + expensive

Inelastic Elastic You Won’t change your decision easily You’ll change your decision relatively easily