1. Principles of Economics 2nd edition by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing

2. Chapter 4 Elasticity 8/28/20188/28/2018
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3. This chapter discusses principles associated with
Determinants of Demand Sensitivity to Price Changes
Normal & Inferior Goods
Substitute and Complementary Goods
Price Elasticity of Demand
Cross Elasticity
Supply Elasticity
Elasticity and Taxes
Demand Sensitivity
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4. How would you respond to a cut in the price of a Coke?
That all depends on the price sensitivity of demand for Coke
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5. A B D D Which demand curve is for spark plugs and which for Coca-Cola?
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6. When consumers are very sensitive to a price change what does the demand curve look like?
Relatively flat
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7. When consumers are less sensitive to a price change what does the demand curve look like?
Relatively steep
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8. What factors influence Demand Sensitivity?
Low price goods
Income levels
Substitute goods
Basic goods
Linked goods
Time to adjust
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9. What do low priced goods have to do with sensitivity?
The lower the price of a good the less sensitive consumers are to a price change
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10. How do income levels effect demand?
Poor people are more sensitive to price changes than rich people
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11. What do substitutes have to do with sensitivity?
The more substitutes a good has, the more sensitive consumers are to a price change
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12. What do basic goods have to do with sensitivity?
The greater the need of a good to the consumer, the less sensitive the consumer is to a price change
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13. What do linked goods have to do with sensitivity?
When two goods have a complementary relationship, demand sensitivities are linked to one another
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14. What are some examples of Complementary Goods?
computers and software
cars and gasoline
tapes and tape players
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15. What does time have to do with sensitivity?
The more time to adjust, the more sensitive consumers are to a price change
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16. What is Elasticity? A term economists use to measure sensitivity
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17. How do we measure the Price Elasticity of Demand?
The percentage change in quantity demanded divided by the percentage change in price
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18. If there is an increase from 3 units to 5, what is the percentage increase?
2/3 = 66%
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19. If there is a decrease from 5 units to 3, what is the percentage decrease?
2/5 = 40%
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20. P A 2 B 3 D Q
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2020

21. Problem - When we move along a demand curve between two points, we get different answers to elasticity depending if we are moving up or down the demand curve
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22. If we go from 3 to 5, the percentage change is 2/3 , but if we go from 5 to 3, the percentage change is 2/5 , so the elasticities are different
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23. The answer to this problem is to work with averages ...
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24. divided by Price elasticity equals the change in quantity demanded
sum of quantities/2
divided by
change in price
sum of prices/2 24
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25. Quantity Price Bananas 200 $20 $18 240 Oranges 400 $40 280 $70 2525
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26. What is the Price Elasticity of Demand for bananas?2 40 =
220 19 19 40
760 = X 2
220
440
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27. What is the Price Elasticity of Demand for oranges?
120 30 =
340 55 55
120
6,600 = X 30
340
10,200
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28. If a college raises tuition, what happens to revenue?
If demand is elastic - revenue goes down
If demand is inelastic - revenue goes up
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29. If price increases and the revenue increases, the demand curve within the price range is price inelastic, < 1
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30. If price increases and the revenue decreases, the demand curve within the price range is price elastic, > 1
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31. If total revenue does not change when price increases, the demand curve is unitary elastic, value equals 1
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32. What strategies do Coca-Cola and Pepsi use to make the demand for their products less elastic?
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33. What is Cross Elasticity of Demand?
The percentage change in the quantity demanded of one commodity resulting from a 1 percent change in price of another commodity
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34. If negative - complements (steak & steak sauce)
If positive - substitutes (butter & margarine)
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35. What is Income Elasticity of Demand?
The ratio of the percentage change in quantity demanded to the percentage change in income
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36. When is a demand curve income elastic?
When a 1% change in income generates a greater than 1% change quantity demanded
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37. When ia demand curve income inelastic?
When a 1% change in income generates a less than 1% change quantity demanded
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38. A good that people buy less of as their incomes increase
What is an
Inferior Good?
A good that people buy less of as their incomes increase
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39. A good that people buy more of as their incomes increase
What is a
Normal Good?
A good that people buy more of as their incomes increase
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40. What is Price Elasticity of Supply?
The ratio of the percentage change in quantity supplied to the percentage change in price
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41. Does time effect Supply Elasticities?
Yes!
The more time, the more elastic the supply curve
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42. Which type of good would be best to tax to raise the most revenue?
Goods with inelastic demand curves
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43. What does the Tobacco Resource Center do to increase the elasticity of demand for cigarettes?
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44. What factors influence Demand Sensitivity?
What is Elasticity?
How do we measure the Price Elasticity of Demand?
What is Cross Elasticity of Demand?
What is Income Elasticity of Demand?

45. END
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