Last Word: Ch 4 Review due/Quiz Friday Consider: As a business owner, should you raise or lower prices to generate more revenue? Why?

Price and Demand  We know that price is the most significant factor that influences demand  Price up, demand down  Price down, demand up  LAW OF DEMAND…  But what about this…?

Why is he mad? Why is the cartoon “ironic”? What does this say about demand ?

New question: HOW MUCH DOES DEMAND CHANGE WHEN PRICES CHANGE?  Depending on the product, and a few other factors  Does demand change a lot or a little in response to price changes?

Chapter 4, Section 3

What is elasticity of demand? Elasticity of demand is a concept that describes HOW RESPONSIVE consumers are to price changes in the marketplace. Demand is elastic if quantity demanded changes significantly as price changes. Demand is inelastic if quantity demanded changes little as price changes.

For example…  Items like expensive sports cars, or name-brand jeans…  Are susceptible to price changes; their demand will change significantly when price changes  Other items, like bread or sugar…  Their demand changes very little even when price changes  People still need them almost regardless of price

There are 3 things you need to know about a product before you can know its “elasticity”  First, whether there are readily available (and roughly equivalent) substitutes  Second, whether the item takes a large portion of a person’s income  Third, whether the item is considered a necessity or a luxury

Factor #1 – Availability of Substitute Goods/Services If there is no substitute for a good or service, demand for it tends to be inelastic. (ex. insulin) People are, in a sense, forced to buy the product almost regardless of price, so demand doesn’t change very much even if price changes

Factor #1 – Availability of Substitute Goods/Services However, if many substitutes are available, demand tends to be elastic. (ex. beef) People can go elsewhere and buy similar products (that do basically the same thing) for less money

Factor #2 – Proportion of Income Demand for products that take up a significant portion of your income tends to be elastic. Again, demand for these goods will change greatly if price changes

Factor #2 – Proportion of Income Demand for products that take up little of your income tends to be inelastic. They don’t cost you a lot, so you don’t think much about buying less if price changes

Factor #3 – Necessities vs. Luxuries Demand for necessities tend to be inelastic. (addictive substances may fall under this category too.) People need to buy these, so demand changes very little when price changes, even reductions in price

Factor #3 – Necessity or luxury? Demand for luxuries tend to be elastic. That is, people are less likely to keep buying them when price goes up, and much more likely to buy them when price goes down

What does elasticity look like on a graph? Elastic

What does elasticity look like on a graph? Inelastic

Practicing Elasticity  There is an equation for determining elasticity  % change in Q D over % change in $$  If the number is >1, the product is considered elastic % Q D % Price

Homework: Quiz tomorrow; Ch 4 review due FrontPage: NNIGN Bad Newspapers

There are 3 things you need to know about a product before you can know its “elasticity”  First, whether there are readily available (and roughly equivalent) substitutes  Second, whether the item takes a large portion of a person’s income  Third, whether the item is considered a necessity or a luxury

Readily available /equal substitute? Large portion of income? Necessity or luxury? Elastic or Inelastic demand? Salt Cars, in general Toothpicks Coffee Tap water Chevy Trucks Gasoline, in the short term “Heinz” ketchup Gasoline, in the long term Movies Restaurant meals iPad 3

Will it?

Demand for Pirates tickets: elastic or inelastic? Price Quantity Demanded $7510,000 $ $ $ $ Another question: At which price is it best for the Penguins to sell their tickets? Inelastic

What is the best price for the Pirates? PriceQuantity Demanded $7510,000 $ $ $ $ Revenue $750,000 $800,000 $750,000 $800,000 $500,000 When revenue increases after lowering of price, demand is ELASTIC When revenue decreases after lowering of price, demand is INELASTIC

The Elasticity of Pizza