1. DO NOW!! Imagine Mcdonalds doubled its prices…
Would people still buy mcdonalds? Why or why not?
Now a cancer pharmaceutical company doubled its prices… how might that differ from Mcdonalds?

2. How do price, income, and other factors affect buying/selling?
Elasticity
How do price, income, and other factors affect buying/selling?

3. Price Elasticity of Demand
Price Elasticity of Demand: sensitivity of consumers to changes in price
Elastic: highly sensitive
Inelastic: not very sensitive
Ed = % change in Qd
% change in P
 Take Absolute Value of answer…

4. Price Elasticity of Demand
Ed>1 is Elastic ….. Ed <1 is Inelastic
Ed = 1 is called Unit Elastic
Extreme Cases:
P up leads to Qd zero = “Perfectly elastic”
P up leads to No change in Qd = “Perfectly Inelastic”
Graphed like this…

5. Total Revenue Test TR = P x Q P up, TR down = elastic
P up, TR up = inelastic
P up, TR same = Unit Elastic
Ex: At P=4, Qd is 8. At P=5, Qd is 7…
Is D elastic, inelastic, or Unit Elastic?
Ex: For same curve, At P=8, Qd=3. At P=9, Qd = 2… What is elasticity?

6. DO NOW!!
What characteristics of a product do you think make the demand for that product more Elastic or Inelastic?
Which might be more elastic: Hardware nails or rubies?

7. Determinants of Price Elast. (LIST)
Luxury vs. necessity
Luxury = elastic
Income proportion
High proportion ($$$$$) = elastic
Substitute availability
 Many available = Elastic
Time period
 More time = easier adjust = elastic

8. More Elastic or Inelastic?
Cavity Fillings?
Lexus cars?
Chewing gum?
Socks?
Emeralds?
Screws?
Ketchup?

9. DO NOW!!
Pretend the price of product A rises and as a result, the Qd of product B goes up. What might that mean about Product A and B?
If as income goes up, Qd of product A falls. What could that mean about product A?

10. Price elasticity of Supply
Sensitivity of change in Price on Qs
Ex: If P up a bit, Qs up a lot = “elastic”
Changes over time:
Market Period: Immediate period
No time to adjust = perfectly inelastic
Short Run: fixed factors, work harder
Small adjustment = rather inelastic
Long run = adjustable = more elastic

11. Cross-Elasticity of Demand
Sensitivity of purchasing a good based on change in P of related good
*How many more ties are demanded when P of a dress shirt falls?
Exy= % change in Qd of X
% change in P of Y
Ex: P of shirts goes from 20 to 10, and Qd of ties goes from 1M to 3M…
Calculate Cross Elasticity of Demand?

12. Cross-Elasticity of Demand
If Exy is positive = Substitutes
If Exy is negative = Compliments
If Exy=0  Unrelated or independent
* What is the relationship between ties and shirts from our example?

13. Income Elasticity of Demand
Sensitivity of purchasing a good based on change in income
*How many more iPhones are demanded when avg income doubles?
Ei = % change in Qd
% change in income
If positive = Normal Good
If Negative = Inferior good