Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 3 Competitive Dynamics and Government Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Elastic and Inelastic Demand (a)  Price elasticity of demand shows how responsive consumers are to price changes  = % change in quantity demanded % change in price Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

elastic demand means % change in quantity demanded is more than % change in price; in other words a small change in price can cause a great change in quantity demanded

Example  If I increase the price of product A, the quantity demanded is going to go down significantly OR  If I decrease the price of product A, the quantity demanded is going to up significantly  Can you think of possible situations where either scenario would occur?

Elastic and Inelastic Demand (a) inelastic demand means % change in quantity demanded is less than % change in price. In other words, a change in price will only affect the quantity by a small degree. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Example  The increase or decrease of the price for a product is not going to affect the quantity demanded by very much  Can you think of possible situations where this scenario would occur?

Elastic and Inelastic Demand (a) unit-elastic demand means % change in quantity demand equals % change in price. A change in price will affect the quantity demanded by the same degree Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Elastic and Inelastic Demand Example:  During the winter, the vendor raises her price by 20%, from $2->$2.40, causing a 50% decrease in quantity demanded (from 1000 cones to 500 cones) ELASTIC  During the summer, the vendor raises her price by 20%, from $2->$2.40, causing a 10% decrease in quantity demanded (from 1000 cones to 900 cones) INELASTIC

Calculating Price Elasticity of Demand  A numerical value for price elasticity of demand (e d ) is found by taking the ratio of the changes in quantity demanded and in price, each divided by its average value.  In mathematical terms: e d = ΔQ d ÷ average Q d Δprice ÷ average price Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

 Elasticity > 1= Elastic  Elasticity < 1 = Inelastic  Elasticity = 1 = Unit elastic

Determinants of the Price Elasticity of Demand  There are four determinants: necessities versus luxuries (more inelastic for necessities and more elastic for luxuries) Availability of substitutes (products with more substitutes more elastic) portion of consumer incomes (products with smaller portions more inelastic) time (more elastic with the passage of time) Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Elastic and Inelastic Demand (b) Figure 3.1 Page 56 Elastic Demand Curve for Ice Cream Cones % 50% 20% 10% Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. D1D1 D2D2 Quantity Demanded (cones) Price ($ per cone) Inelastic Demand Curve for Ice cream Cones Quantity Demanded (cones) Price ($ per cone)