1. Elasticity shows how sensitive Quantity is to Change in Price.

2. Consumers will buy more when prices go down and less when prices go up
THE LAW OF DEMAND SAYS...
Consumers will buy more when prices go down and less when prices go up
HOW MUCH MORE OR LESS?
DOES IT MATTER?

3. 4 Types of Elasticity Elasticity of Demand Elasticity of Supply
Cross-Price Elasticity (Substitute or Complement)
Income Elasticity (Normal or Inferior)

4. 1. Elasticity of Demand Inelastic Elastic % Δ Q % Δ P Ex. Ex. 20% 5%
Price
Quantity
Price
Quantity
20% 5%
35%

5. Elastic or Inelastic Explain why for each of the following. Salt
New Cars
Pork Chops
European Vacation trip
Insulin
Insulin at one of four drugstores in a shopping mall.

6. 1. Elasticity of Demand
Elastic
Inelastic

7. 1. Elasticity of Demand
Elastic
Inelastic

8. 1. Elasticity of Demand 1 Inelastic Elastic % Δ Q % Δ P Unit Elastic
Price
Quantity
20%
% Δ Q
% Δ P
Unit Elastic 1
Inelastic
Elastic

9. 1. Elasticity of Demand Total Revenue Test Price Inelastic Elastic
TR = P x Q
Inelastic
Elastic
Price

10. Is the range between A and B, elastic, inelastic, or unit elastic?
Total Revenue 10 x 100 = $1000
Total Revenue 5 x 225 = $1125
Price
Quantity A B
Price decreased and TR increased,
so…
Demand is ELASTIC 10 5
% Δ Q
% Δ P

11. Is the range between B and A, elastic, inelastic, or unit elastic?
Total Revenue 10 x 100 = $1000
Total Revenue 8 x 110 = $880
Price
Quantity A B
Price increased and TR increased,
so…
Demand is INELASTIC 10 8
% Δ Q
% Δ P

12. 2. Elasticity of Supply Inelastic Elastic % Δ Q % Δ P Ex. Ex. 20% 5%
Price
Quantity
Price
Quantity
20% 5%
35%

13. 2. Elasticity of Supply 1 Inelastic Elastic % Δ Q % Δ P Unit Elastic
Price
Quantity
20%
% Δ Q
% Δ P
Unit Elastic 1
Inelastic
Elastic

14. Elasticity Coefficient for Demand & Supply
| Δ Q |
% Δ Q
% Δ P
(Q1+Q2)/2 =
| Δ P |
(P1+P2)/2
Price
Quantity A B 15 5
QBig-Qsmall
(QBig+Qsmall)/2
PBig-Psmall
(PBig+Psmall)/2

15. Elasticity Coefficient for Demand & Supply
QBig-Qsmall
(QBig+Qsmall)/2
% Δ Q
% Δ P =
PBig-Psmall
(PBig+Psmall)/2
Price
Quantity A B 15 5
120
( )/2
160 =
15-5 10
(15+5)/2 10

16. 3. Cross-Price Elasticity
Complement
Substitute
% Δ Q
% Δ P B A

17. 3. Cross-Price Elasticity
Complement
Substitute
% Δ Q
% Δ P B A
Complement
Substitute

18. 4. Income Elasticity
Inferior
Normal
% Δ Q
% Δ I

19. 4. Income Elasticity
Inferior
Normal
% Δ Q
% Δ I
Inferior
Normal

20. Elasticity Practice

21. Elasticity
Price
1.25
1.00
0.75
0.50
0.25
Quantity
200
250
300
350
400
The demand for video game tokens at the neighborhood arcade. Using the midpoints formula, between $.50 and $.25 the price elasticity of demand equals______?
Suppose that Price = .75 currently. A decrease in price will do what to total revenue?

22. This demand curve is price elastic from _______ to _______.
10.50
9.50
8.50
7.50
6.50
5.50
4.50
Quantity
220
260
300
340
380
420
460
Demand for prime rib. Using the midpoints formula, this demand curve is unit elastic between _______?
This demand curve is price elastic from _______ to _______.
Suppose that Price = $6.00, A 3% decrease in quantity demanded would require a ____ increase in price.
Suppose that Price = $6.50 currently. A decrease in price will do what to total revenue.

23. AP Micro Free Response
Elasticity FRQ-Assume the following about laptop and desktop computers:
The demand for computers is price inelastic
Laptop and desktop computers have a cross price elasticity coefficient of +3.6
Computers and DVD burners have a cross price elasticity coefficient of -0.8
All computers have a income elasticity coefficient of +2.3
(a) Using correctly labeled graphs, show the impact of a change in technology that improves only the production of laptop computers on the following:
i. Price of laptop computers
ii. Output of laptop computers
iii. Total revenue of laptop computer producers
iv. Price of desktop computers
v. Output of desktop computers
(b) Using new correctly labeled graph, show the impact of a decrease in price of DVD burners on the following:
i. Price of computers
ii. Output of computers
(c) Using new correctly labeled graphs, show the impact on the following when income increases by 30%:
ii. Quantity of computers
iii. Price of DVD burners
iv. Quantity of DVD burners