1. Elasticity of Demand

2. What is Elasticity?
Tells us how different variables in the economy respond to each other
If one thing happens, how will it affect something else?
Elasticity of Demand: how much will a change in price affect the quantity demanded?

3. Economists use the steps shown here to calculate elasticity of demand
Economists use the steps shown here to calculate elasticity of demand. Why do you think observers may want to be able to measure elasticity precisely?

4. Elasticity Defined
Price Range- elasticity can vary depending on the unit price change
Elasticity Values-
Less than 1: inelastic
exactly equal to 1: unitary elastic
More than 1: elastic

5. Gasoline is a good many people continue to buy even when the price rises. What does this cartoon suggest about the challenge consumers face when gas prices rise?

6. Factors Affecting Elasticity
Availability of Substitutes-
yes elastic, no inelastic
Relative Importance-
no elastic, yes inelastic
Necessities Versus Luxuries-
luxury elastic, necessities inelastic
Change Over Time-
sticky prices (short run) v. flexible prices (long run)

7. Elasticity of demand varies from situation to situation.
Factors Affecting Elasticity
Elasticity of demand varies from situation to situation.

8. Factors Affecting Elasticity
When home prices fell when recession hit in 2007, demand did not rise immediately. Why might demand for housing stay flat at first even when prices fall sharply?

9. How Elasticity Affects Revenue
Elasticity helps us measure how consumers respond to price changes for different products.
Important tool for business planners
The elasticity of demand determines how a change in prices will affect a firm’s total revenue, or income.

10. How Elasticity Affects Revenue
This art gallery needs to sell only a small number of its high-priced artworks to generate significant total revenue.

11. Achieving higher revenue means finding the best combination of price and quantity demanded. Why does revenue for this restaurant fall when price increases from $4 to $5?

12. What determines Demand Elasticity?
Can the purchase be delayed?
Yes  elastic (new DVD)
No  Inelastic (medication)
Are adequate substitutes available?
Yes  Elastic (generic vs. brand name meds)
No  Inelastic
Require much income?
Yes  Elastic (might need time to save)

13. How Elasticity Affects Revenue
The relationship between price change and revenue differs depending on elasticity of demand. In which two situations will revenue likely fall in response to a price change?

14. Fundamentals of Supply

15. The Effect of Price on Supply
Suppose you were running a business. What would you do if you discovered that customers were still willing to buy your product if you raised the price 20 percent?
Would you take an extra day off and only work four days each week? After all, you would still earn the same income with 20 percent less work.
Would you respond by producing more and increasing your revenue?

16. What is Supply?
The amount of a product offered for sale at all possible market prices
Law of Supply:
Suppliers normally offer more for sale at higher prices and less for sale at lower prices.

17. The Effect of Price on Supply
The price of a good determines how much of that good a supplier will provide. How is the law of supply different from the law of demand?

18. The Effect of Price on Supply

21. Individual Supply Curve
The Supply Curve for Beach Balls:

22. Market Supply Curve

23. Change in… Quantity Supplied Supply
Change in the amount that producers bring to market at any given price
Supply
Suppliers offer different amounts of products for sale at all possible prices in the market.

24. Elasticity of Supply Elasticity of Supply Over a Short Time:
Agriculture inelastic in the short run
Services elastic on the short run
Elasticity of Supply Over a Longer Time:
Agriculture is elastic in the long run

25. Suppose the price for a good changed by 100 percent and in response the quantity supplied changed by 50 percent. Explain whether supply is elastic or inelastic in this case.

26. Cranberry vines take three or four years to produce fruit, meaning that product has inelastic supply in the short term.