Elasticity of Demand- A measure of how consumers react to a change in price Inelastic- Your demand for a good that you will keep buying despite a price.

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Presentation transcript:

Elasticity of Demand- A measure of how consumers react to a change in price Inelastic- Your demand for a good that you will keep buying despite a price increase. Patented prescription drugs, Elastic- Your demand for a good that you will buy much less of after a small price increase Lobster,

Price range If the price of a magazine increases from 20 cents to 30 cents, it will be inelastic. If the price increases from $4 to $6, the demand will be much more elastic. Elasticity= % change in demand of good/ % change in price of good. Values of Elasticity If the elasticity of demand is less than 1, INELASTIC If the elasticity of demand is greater than 1, ELASTIC If the elasticity of demand is exactly 1, UNITARY ELASTIC

Availability of Substitutes Fewer substitutes—still may buy, even with a price increase. Concert tickets, Life saving medicine Lack of substitutes can make demand inelastic, wide choice makes demand elastic. Relative Importance If you spend a large amount of your income on a good, a price increase will force you to make tough choices. Must reduce spending on that good. If you spend half your income on clothes, and the price of clothes goes up, you will have to reduce your consumption of clothes. If the price of shoelaces goes up, you wont really notice or spend less on shoelaces.

Necessities Versus Luxuries Whether a person considers a good to be a necessity or a luxury impacts the good’s elasticity of demand for the person. A necessity is a good that people will buy, even if the price goes up. Parents consider milk to be inelastic. Change over time Price changes over time. People cannot respond right away. Demand is inelastic in the short term. Gasoline is more inelastic in the short run, and more elastic in the long run.

Total Revenue- the total amount of money a firm receives by selling goods or services. Pizza: 125 slices per day at $2 a slice…. Total revenue and elastic demand: Price goes down, Total revenue rises Price goes up, Total revenue falls Total revenue and inelastic demand: As the price is lowered, Total revenue falls As the price is raised, Total revenue rises