Elasticity of Demand.

Elasticity of Demand

When Price , Quantity demanded
But, by how much? How much does the price have to go up to get a big or small change in quantity demanded? The answer is…. IT DEPENDS It depends on the price elasticity of the product Elasticity = Measure of sensitivity The extent to which a change in price causes a change in quantity demanded Say to the students-- "You might be saying to yourselves, WHAT DO INSULIN AND BICYCLES HAVE IN COMMON"? PAUSE "How many of you in here know what insulin is used for"?

P Q P Q

Insulin and Bicycles I want to talk about two products for the next
ten minutes. Insulin and Bicycles Say to the students-- "You might be saying to yourselves, WHAT DO INSULIN AND BICYCLES HAVE IN COMMON"? PAUSE "How many of you in here know what insulin is used for"?

Diabetes Let the students know that you are teaching across the curriculum here. This is the molecule for insulin. molecules

Every morning, millions of diabetics give
themselves a shot of insulin just to stay alive. Talk to the students about how difficult it must be to be a diabetic.

over 10 million diabetics, 110 million worldwide.
In the U.S., there are over 10 million diabetics, 110 million worldwide. Information about diabetes. (2001)

Now you say to yourself again, so what do insulin and bicycles have in common? Diabetics ride bicycles.

P P $300 $3 $200 $2 $100 $1 D D 10 m Q 100 200 300 Q Insulin Bicycles
Would diabetics be willing to pay $1 for a bottle of insulin? How many diabetics would be willing to pay $2 a bottle? All of them. How about $3? All of them. The demand curve for insulin between the prices of $3 and 1 cent is perfectly INELASTIC. For bicycles though, at $300, 100 bicycles would be purchased; at $200, 200 bicycles would be purchased; at $100, 500 bicycles would be purchased. So what happened to DEMAND as the price of bicycles goes down? NOTHING! Something happens to the QUANTITY DEMANDED. The demand curve stays the same. (You are just testing the students’ memory here). Insulin Bicycles

e P INELASTIC P ELASTIC $300 $3 $200 $2 $100 $1 D D 10 m 100 200 300 Q
To help the students to remember inelastic and elastic, you can tell them for Inelastic, the demand curve looks like an “I,” Insulin, Inexpensive. For Elastic, the demand curve looks sort of like an “E” (okay, sort of), Expensive, and Bicycles has an “e” in it. Insulin Bicycles Four tests for figuring elasticity of demand: 1. Few substitutes Many substitutes One has few substitutes and one has many? 2. Necessity Luxury One is a necessity and the other is a luxury? 3. Inexpensive Expensive One is expensive and the other is inexpensive

More time = More elastic
ELEMENT OF TIME In General, demand is more elastic over longer periods of time. Given enough time, consumers may develop tastes for other products or actively look for & find substitutes which would increase elasticity. More time = More elastic Say to the students-- "You might be saying to yourselves, WHAT DO INSULIN AND BICYCLES HAVE IN COMMON"? PAUSE "How many of you in here know what insulin is used for"?

e P INELASTIC P ELASTIC $300 $3 $200 $2 $100 $1 D D 10 m Q 100 200 300
To help the students to remember inelastic and elastic, you can tell them for Inelastic, the demand curve looks like an “I,” Insulin, Inexpensive. For Elastic, the demand curve looks sort of like an “E” (okay, sort of), Expensive, and Bicycles has an “e” in it. Insulin Bicycles Four tests for figuring elasticity of demand: 4. Less time More time

Why? Pizza Elastic Many substitutes Food Inelastic Sports Cars Elastic
I am going to name a product and you let me know if the demand for the product is elastic or inelastic: Elastic or Inelastic? Why? Pizza Elastic Many substitutes Food Inelastic Few substitutes + Necessity Sports Cars Elastic Expensive/Luxury Hamburger Elastic Many substitutes Gasoline Inelastic Few substitutes Cigarettes Inelastic Necessity (addiction) Shelter Inelastic Few substitutes + necessity House Elastic Many Substitutes + expensive

Inelastic Elastic You Won’t change your decision easily
You’ll change your decision relatively easily

Graph Identification Reference
Elasticity of Demand D D D D D Unit Elastic (Normal) Perfectly Inelastic Inelastic Perfectly Elastic Elastic Never happens in real life

Finding products with Inelastic Demand and Taxing them.

*The Federal Tax of 18.4 cents per gallon is collected in all states in addition to any state or local taxes on gasoline sales.

Alabama 18 Montana 27.75 Alaska 8 Nebraska 24.6 Arizona Nevada 23
State Tax/Cents per gallon* Tax/Cents per Gallon* Alabama 18 Montana 27.75 Alaska 8 Nebraska 24.6 Arizona Nevada 23 Arkansas 21.5 New Hampshire California New Jersey 14.5 Colorado 22 New Mexico 17 Connecticut 25 New York 29.65 Delaware North Carolina 23.4 Dist. of Columbia 20 North Dakota 21 Florida 14.1 Ohio Georgia 7.5 Oklahoma Hawaii 16 Oregon 24 Idaho Pennsylvania 25.9 Illinois 19 Rhode Island 30 Indiana South Carolina Iowa 20.1 South Dakota Kansas Tennessee Kentucky 15 Texas Louisiana Utah 24.5 Maine Vermont Maryland 23.5 Virginia 17.5 Massachusetts Washington Michigan West Virginia 20.5 Minnesota Wisconsin 31.1 Mississippi Wyoming 14 Missouri Federal Tax Rate 18.4

Telephone?

This tax adds three percent to the cost of the telephone bill of consumers. If a consumer has a monthly bill for local and long-distance service totaling $100, an additional $3 is applied to the bill with the result that the consumer must pay $103, although the actual charge for service amounted to $100. In fiscal year 1999, the telephone excise tax provided $5.2 billion to the Federal Treasury.

Cigarettes?

Sorted by Tax Rate Sorted Alphabetically by State Name
A P P E N D I X Sorted by Tax Rate Sorted Alphabetically by State Name Tax Rate Tax Rate State (per pack of 20) State (per pack of 20) Alabama $0.165 Alaska $1.000 Arizona $0.580 Arkansas $0.315 California $0.870 Colorado $0.200 Connecticut $0.500 Delaware $0.240 District of Columbia $0.650 Florida $0.339 Georgia $0.120 Hawaii $1.000 Idaho $0.280 Illinois $0.580 Indiana $0.155 Iowa $0.360 Kansas $0.240 Kentucky $0.030 Louisiana $0.240 Maine $1.000 Maryland $0.660 Massachusetts $0.760 Michigan $0.750 Minnesota $0.480 Mississippi $0.180 Missouri $0.170 Montana $0.180 Nebraska $0.340 Nevada $0.350 New Hampshire $0.520 New Jersey $0.800 New Mexico $0.210 New York $1.110 North Carolina $0.050 North Dakota $0.440 Ohio $0.240 Oklahoma $0.230 Oregon $0.680 Pennsylvania $0.310 Rhode Island $1.000 South Carolina $0.070 South Dakota $0.330 Tennessee $0.130 Texas $0.410 Utah $0.515 Vermont $0.440 Virginia $0.025 Washington $1.425 West Virginia $0.170 Wisconsin $0.770 Wyoming $0.120

Hard Liquor, Beer, and WineTax

Federal Excise Taxes Weird Taxes

Elasticity of demand & Taxes

Elasticity of demand & subsidies

Elastic Demand Curve & Subsidies
Price Price elastic D inelastic D S S S1 S1 subsidy subsidy P P P1 P1 D D Q Q1 Quantity Q Q1 Quantity

Price Quantity S D Q P elastic D Price inelastic D S S1 subsidy P P1 Q1 D Q Quantity Subsidies lower costs = supply  Price , Quantity  = subsidy, what the gov’t pays = increase in quantity supplied (increase in production)

Price Quantity S D Q P elastic D Price inelastic D S S1 subsidy P P1 Q1 D Q Quantity Assuming the gov’t wants to have the maximum increase in production for the least amount of expenditure…. … that’s a big assumption… the gov’t acting efficiently… but go with it…

Price Quantity S D Q P elastic D Price inelastic D S S1 subsidy P P1 Q1 D Q Quantity Assuming the gov’t wants to have the maximum increase in production for the least amount of expenditure…. … should the gov’t use subsidies to manipulate the market for products with elastic or inelastic demand curves?

Price Quantity S D Q P elastic D Price inelastic D S S1 subsidy P P1 Q1 D Q Quantity ELASTIC Why? Because with an ELASTIC curve, they will get a larger increase in production with a lower amount of expenditure.

Examples The government is worried about the future of the military research and development programs because there has been a decline in the number of people graduating college with Science degrees. The Question: Should the government give a subsidy to science majors in the form of tuition reductions? First: we need to know if the demand curve for science degrees is elastic or inelastic….. Many Substitutes = Elastic Substitutes: Many, there are a lot of different majors to choose from

Examples The government is worried about the future of the military research and development programs because there has been a decline in the number of people graduating collage with Science degrees. The Question: Should the government give a subsidy to science majors in the form of tuition reductions? First: we need to know if the demand curve for science degrees is elastic or inelastic….. Many Substitutes = Elastic Luxury or necessity? Going to college is generally thought of as a luxury. Though one could argue that it is a necessity if your goal is to make decent $ and work in a science field… but for the sake of argument let’s say it’s a luxury. Luxury = Elastic

Examples The government is worried about the future of the military research and development programs because there has been a decline in the number of people graduating collage with Science degrees. The Question: Should the government give a subsidy to science majors in the form of tuition reductions? First: we need to know if the demand curve for science degrees is elastic or inelastic….. Many Substitutes = Elastic Luxury = Elastic Expensive? Yes, college degrees are expensive! Expensive = Elastic

Examples The government is worried about the future of the military research and development programs because there has been a decline in the number of people graduating collage with Science degrees. The Question: Should the government give a subsidy to science majors in the form of tuition reductions? So, if the demand for Science degrees is elastic, then should the government use a subsidy to solve the problem described? Yes

Other reasons besides increased production The gov’t may use subsidies on products that have an inelastic demand curve if their goal is NOT increase production - Make certain products affordable for the disadvantaged - Encourage certain behaviors - Ensure or prevent expected outcomes for society Insulin: they want to ensure that all diabetics in America can afford their needed medication Birth control pills for college students: they want to keep the number of unwanted pregnancies low and the number of female college graduates as high as possible Watch video if there is at least 5 mins left in class

Graph Identification Reference
Elasticity of Demand Unit Elastic Perfectly Inelastic Inelastic Perfectly Elastic Elastic

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Elasticity of Demand.

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Elasticity of Demand.

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