1. Warm-Up
What is wrong with this statement: “We bought enough. We just ran out!”
Draw what the market might look in this situation.
What should happen to either price, demand or supply to reach equilibrium.

2. Medicare’s Costly Role in Health Care, Washington Post, January 1, 2014, A10.
Medicaid Expands Role Under New Law, Washington Post, January 1, 2014, A1.

3. Income and Substitution Effects
Chapter 10: The Rational Consumer (pages )

4. Law of Demand… Substitution Effect Income Effect
 in PA makes Good A relatively more expensive
 in QD
Income Effect
 in price lowers purchasing power

5. What if… Burgers & chicken are normal PBurgers  while Pchicken 
How will the change in burger price affect quantity demanded?
Explain the substitution effect.
Explain the income effects.

7. Introduction to Elasticity
Chapter 6: Elasticity (pages )

8. Elasticity LARGE D in QD = Elastic D in P will lead to D in QD
Question is how much
LARGE D in QD = Elastic
small D in QD = Inelastic

9. Price Elasticity of Demand
Elasticity changes if you move up or down the curve
MIDPOINT METHOD solves problem

10. Midpoint Method

11. Using Midpoint Method

12. Sage & Share Calculate elasticity of demand
Price
Quantity Demanded
Situation A
$1.50
100,000
Situation B
$1.00
200,000
Calculate elasticity of demand
Is demand for strawberries elastic or inelastic?

13. How elastic is elastic? PERFECTLY INELASTIC QD does not change with DP
Vertical line

14. Perfectly Inelastic 1 Quantity of shoelaces
Quantity of shoelaces
(billions of pairs per year)
(a)
Perfectly Inelastic Demand: Price Elasticity of Demand = 0 $3 $2
Price of shoelaces
(per pair) D 1
An increase in price…
… leaves the quantity demanded unchanged.

15. How elastic is elastic? PERFECTLY INELASTIC PERFECTLY ELASTIC
DP leads to no DQD
Elasticity = 0
PERFECTLY ELASTIC
DP leads to large DQD
Elasticity = ∞

16. Perfectly Elastic
(b)
Price Elastic Demand: Price Elasticity of Demand = ∞ $5
Price of pink tennis balls
(per dozen)
Quantity of tennis balls (dozens per year)
At exactly $5, consumers will buy any quantity
At any price above $5, quantity demanded is zero D 2
At any price below $5, quantity demanded is infinite

17. How elastic is elastic? PERFECTLY INELASTIC PERFECTLY ELASTIC
DP leads to no DQD
Elasticity = 0
PERFECTLY ELASTIC
DP leads to large DQD
Elasticity = ∞
UNIT ELASTIC
Elasticity = 1

18. . . . generates a 20% decrease in the quantity of crossings demanded.
Unit Elastic
(a) Unit-Elastic Demand: Price Elasticity of Demand = 1
900
1,100
$1.10
0.90
Price of
crossing
Quantity of crossings (per day) D 1
A 20% increase in the price . . . B A
. . . generates a 20% decrease in the quantity of crossings demanded.

20. A Question...
If you want to increase revenue, what should you do with the price?

21. So What?!? Elasticity predicts D in TOTAL REVENUE with DP TR = P * Q
1,100
$0.90 D
Total revenue = price x quantity = $990

22. DTR Depends on … PRICE EFFECT QUANTITY EFFECT
DP leads goods to either be more or less expensive
P  TR
QUANTITY EFFECT
DP leads to a either more or fewer goods demanded
P  QD  TR

23. Effect of P on TR 900 1,100 $1.10 0.90 Price of crossing
$1.10
0.90
Quantity of crossings (per day)
Price of crossing
Price effect of price increase: higher price for each unit sold D
Quantity effect of price increase: fewer units sold C A B

24. General Rules … Changes in Price Elasticity If DP =  TR then …
Unit elastic
If P =  TR then …
Elastic
If P =  TR then …
Inelastic
Changes in Price
Elasticity
If DP =  TR then …
Unit elastic
If P =  TR then …
Elastic
If P =  TR then …
Inelastic

25. Elasticity Ds Along Curve1 2 3 4 5 6 7 10 9 8
$25 24 21 16
Quantity
Total revenue
$10
Price
The price elasticity of demand changes along the demand curve
Elastic D
Unit-elastic
Price QD TR $0 10 1 9 2 8 16 3 7 21 4 6 24 5 25
Inelastic
Demand is elastic: a higher price reduces total revenue
Demand is inelastic: a higher price increase total revenue

26. Real Life Example…

27. Eat Up Idiots…
How can you remember relative elasaticities along the demand curve? Eat … Up … Idiots

28. Elasticity Impacted By…
Substitutability
Proportion of income spent on good
Luxury or necessity
Time