Applying Demand and Supply: The Concept of ELASTICITY.

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Presentation transcript:

Applying Demand and Supply: The Concept of ELASTICITY

So far…

Furthermore…

So… Q d /Q s does change as P changes BUT… BY HOW MUCH does it change? Should I raise/lower my price? How much more or less will people buy? Will I make more $ or lose $ ?

Will an increase in price make enough additional $ to offset the drop in Qd? Will a decrease in price increase Qd enough to offset the lower price per unit? How responsive is Qd to a change in price?

“Elasticity” Def’n: measures how responsive demand or supply quantities are to a given change in price Elasticity Coefficient : a numerical indicator (calculated) of the strength and type of elasticity used to indicate whether revenues will rise/fall in response to a price change

Case #1:Price Elasticity of Demand Aka E d (coefficient of demand elasticity) How responsive is Q d (and R) to a change in price? Is Price really important or not important at all in influencing how much you will buy? Price very important = “elastic” demand (price elastic) Price not important = “inelastic” demand (price inelastic)

Factors Influencing E d : What makes the demand for a product/service more elastic or more inelastic? a) Necessity vs. Luxury Good ? b) Few vs. Many Substitutes ? c) Little vs. Lots of Time to Compare ? d) Large vs. Small % of Budget? In short, HOW BADLY do you need this item? Enough to overlook the price change… ?

Next Step… Calculating E d ’s