Chapter 4 section 2

 Salt  2015 Nissan GTR  Pork chops  Insulin (you’re diabetic)  Gas one day after price increase  Gas one year after price increase

 Elasticity of demand dictates how drastically buyers will cut back when a price rises or increase their demand for a good when the price falls Elasticity of = % change in quantity demanded Demand % change in price

 If the demand is not very sensitive to a change in price it is inelastic  If the demand is very sensitive to a change in price it is elastic D P Q D P Q P1P1 Q1Q1 Q2Q2 P 2 =

1. Number of substitutes 2. Luxuries versus necessities 3. Percentage of income spent on the good 4. Time to adjust to the price change

 A product with lots of substitutes tends to be elastic  A product with few or no substitutes tends to be inelastic

 If your favorite musical group has a concert and you want to attend, there really is no substitute for a ticket  Is a moderate change in price is not going to change your mind. Is your demand elastic or inelastic? Inelastic D P Q

Do you need it to survive?  Heart medicine tends to be inelastic  Coach purses tend to be elastic

How expensive is it?  Buyers are more responsive to price changes for goods on which they spend a larger percentage of their income P Q Q1Q1 P1P1 Q2Q2 P2P2 D

 Buyers are less responsive to price changes for goods on which they spend a small percentage of their income  If the price of chewing gum doubled, would you cut back on buying gum?  Your demand for gum is inelastic D P Q Q1Q1 P1P1 Q2Q2 P2P2

 Because consumers cannot respond quickly to price changes, their demand is inelastic in the short term  When a price changes, consumers often need time to change their shopping habits or find a substitute. Demand is elastic in the long run.

 Tells business owners how much a change in price will affect the bottom line

 A company’s total revenue is the amount of money the company receives by selling its goods  Total revenue= price of goods X quantity sold

 In July Joe’s Pizza sells pizza for $2.50 a slice and sells 200 slices per day.  In August Joe raises his prices from $2.50 to $3 per slice, then the amount he sells would decrease from 200 to 100 slices a day.  Increase in Price resulted in an Decrease in Total Revenue! Joe’s pizza is ELASTIC PriceQuantity sold Total Revenue July August

 John’s Pizza in Barrow, Alaska, also sells his pizza for $2.50 a slice and sells 200 slices a day.  If John raised his prices from $2.50 to $3 per slice, then the amount he sold would decrease from 200 to 175 slices a day.  Increase in Price resulted in an INcrease in Total Revenue! John’s Pizza is relatively INELASTIC for demand PriceQuantity sold Total Revenue July August

 Unit-elastic means the % they increase the price is exactly equal to the % demand drops  trailer trailer PriceQuantity sold % change Qd % change price Total Revenue July August

 Students complete Activity 1 and 2 with a partner  Get out ONE piece of paper—2 people, 1 paper  DO NOT WRITE ON ACTIVITY 1!  DO NOT WRITE ON ACTIVITY 2!