Elasticity of Demand How sensitive is demand?

Slope of a Demand Curve What does slope indicate about a product? Do all demand Curves have the same slope? Demand Curves

Slope of Demand Curve Indicates the responsiveness of Quantity Demanded to a change in Price. If the price of a good increases 20% => how much does QTY demand decrease?

Elastic Goods Elastic demand curves are flat –Sensitive to price changes A ↑ Price leads to a greater ↓ in Qty Demanded D1D1 Px Qty

Inelastic Goods Inelastic goods are NOT sensitive to price changes % Change in Price leads to a Smaller % change in Qty Demanded

Inelastic Goods Inelastic demand curves are steep –Not Sensitive to price changes A ↑ Price leads to a smaller ↓ in Qty Demanded D1D1 Px Qty

Elasticity depends on: # of close substitutes Necessity Proportion of income spent Time period

Price Elastic or Price Inelastic? Soda Heart Surgery Table Salt Gasoline Price Inelastic No real substitutes Price Inelastic Necessity & No real substitutes, Short time period Price Elastic Many substitutes Price Inelastic Small proportion of income, no good substitute

Elastic GoodsInelastic Goods

Why does a business Care? Total Revenue Price * Quantity = Total Revenue Elasticity determines the effect on total revenue

Total Revenue & Inelastic Demand

Total Revenue & Elastic Demand

Total Revenue Profit Total Revenue - Total Expenses = Profit

What you need to know! More elastic demand curves are flat Elastic means Qty D is sensitive to Px Changes Total Revenue => Prices elastic goods Total Revenue => Prices inelastic goods

Elasticity of Demand Practice Problems PROBLEM #1 Consider the degree of elasticity of demand for hard candy. Draw the Demand Curve for hard candy with your best educated guess about the proper slope for its elasticity/inelasticity. Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$2 per pound Qty Demanded=1000 pounds Now, imagine that Candy Manufacturers raise the price of a pound of candy from $2/pound to $4/pound; locate the new point on the demand curve that shows the quantity demanded at $4 per pound. With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

PROBLEM #2 Consider the degree of elasticity of demand for gasoline.Draw the Demand Curve for gasoline with your best educated guess about the proper slope for its elasticity/inelasticity. Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$3 per gallon Qty Demanded=gallons Now, imagine that Oil Manufacturers raise the price of a gallon of gasoline from $3/gallon to $5/gallon; locate the new point on the demand curve that shows the quantity demanded at $5/gallon. With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

ELASTIC DEMANDINELASTIC DEMAND

Total Revenue & Inelastic Demand $10 $6 D1D1. Price increases from $6 to $10 Total Revenue increases from A to B A = $10 * 18 = $180 B = $6 * 20 = $

Total Revenue & Elastic Demand Price Quantity D1D1

Elastic Goods Elastic goods have demand which is very sensitive to price changes A % Change in Price leads to a greater % change in Qty Demanded.

Inelastic Demand Curve PRICE Quantity

Elastic Demand Curve PRICE Quantity

Inelastic or Elastic? GasolineSoda Heart Surgery Table Salt

Total Revenue & Inelastic Demand $10 $6 D1D1 Total Revenue