1. Many slides taken and/or adapted from bized.co.uk
Intro to Elasticity
Many slides taken and/or adapted from bized.co.uk

2. Elasticity The responsiveness of one variable to changes in another
Or…Responsiveness or sensitivity of consumers to a price change

3. PED Price Elasticity of Demand
DEFINITION: The responsiveness of demand to changes in price
PED helps us understand this: If the price rises by 10%, will demand decrease by more than, less than, or exactly 10%?
ELASTIC OR INELASTIC?: Where % change in demand is greater than % change in price
ELASTIC OR INELASTIC? Where % change in demand is less than % change in price

4. Which one of these shows an INELASTIC demand? Why?

5. Factors that Determine Demand Short-Term Elasticity
1. Substitutability
Are there adequate substitutes available?
2. Proportion of Income
Does the purchase use a large portion of income?
3. Luxuries v. Necessities
Can the purchase be delayed?
(Long-Term Elasticity) -- Time
Have consumers had time to adjust to a change in prices? (Short term—people stuck w/their cars…long term—people buy what kind of cars?)
Estimate the elasticity of a…

7. What type of elasticity do you think the following would have?
Salt
Orange juice
Stamps
Gasoline
In general
From a particular station
Water
Baby Food
Tobacco
Insulin
butter
Haircut
Lawyer services
Heart transplant
Schooling at an international school in Guangzhou, China
So, in an effort to make more profits a producer may want to raise prices.
For which of the above would you advise this action?

8. Elasticity Price (£) Quantity Demanded
The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded.
Quantity Demanded

9. Elasticity Each part of equation  (New-original)/original)
The Formula:
In Other Words…
If answer is between 0 and -1: the relationship is inelastic
Each part of equation  (New-original)/original)
Exactly zero: perfectly inelastic; Exactly one: unit elastic
Less than one: inelastic; More than one: elastic
Note: The # is usually negative but is always expressed as a positive

10. The Bigger the Number, the ____ people respond to the price
MORE
Over 1.0 =
Under 1.0 =
Exactly 1.0 =
Elastic
Inelastic
Unit Elastic

11. Total Revenue What is the definition for revenue?
What is the equation for Total Revenue?
In the example below, What is the total revenue if the quantity purchased is 90? 50? 20?

12. Elasticity: “The Revenue Test”
If demand is price elastic:
Increasing price would reduce TR
(%Δ Qd > % Δ P)
Reducing price would increase TR
If demand is price inelastic:
Increasing price would increase TR
(%Δ Qd < % Δ P)
Reducing price would reduce TR

13. Elasticity and Total Revenue

14. Elasticity decrease % Δ Price = -50% % Δ Quantity Demanded = +20%
Producer decides to lower price to attract sales 10
% Δ Price = -50%
% Δ Quantity Demanded = +20%
Ped = -0.4 (Inelastic) 5
The producer should or should not lower the price because total revenue would ________
decrease D 5 6
Quantity Demanded

15. Elasticity Producer decides to reduce price to increase sales
% Δ in Price = - 30%
% Δ in Demand = + 300%
Ped = - 10 (Elastic)
What happens to total revenue? 10
Good move? 7 D 5 20
Quantity Demanded

16. So…if a firm supplies a product that has an inelastic demand, should it likely raise or lower prices to increase total revenue?

17. Primary v. Secondary v. Tertiary: the 3 (Main) Sectors of the Economy
Characteristics?
Examples?
Why/When/How do countries move into different sectors?

18. What is a ‘primary commodity?’
Wheat, oil, copper, rubber, metals, cotton, etc.

19. Is the PED for… Many primary commodities high or low?
Many manufactured products relatively high or low?.

20. Time permitting…more primary/secondary/tertiary info

21. Not sure where, but…

22. 3 Countries: USA, Brazil, Nepal

23. HONG KONG Employment

24. Tibet
1959
2008

25. China