1. Elasticity shows how sensitive quantity is to a change in price.
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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?
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3. Price Elasticity of Demand (PED)
Measurement of consumers responsiveness to a change in price.
What will happen if price increase? How much will it effect Quantity Demanded
Who cares?
Used by firms to help determine prices and sales
Used by the government to decide how to tax
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4. Inelastic Demand
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5. Inelastic Demand
INelastic Demand= Quantity is INsensitive to a change in price.
If price increases, quantity demanded will fall a little
If price decreases, quantity demanded increases a little.
In other words, people will continue to buy it.
20% 5%
A INELASTIC demand curve is steep! (looks like an “I”)
Examples:
Gasoline
Milk
Diapers
Chewing Gum
Medical Care
Toilet paper
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6. General Characteristics of INelastic Goods:
Inelastic Demand
General Characteristics of INelastic Goods:
Few Substitutes
Necessities
Small portion of income
Required now, rather than later
Elasticity coefficient less than 1
20% 5%
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7. Elastic Demand
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8. Elastic Demand An ELASTIC demand curve is flat!
Elastic Demand = Quantity is sensitive to a change in price.
If price increases, quantity demanded will fall a lot
If price decreases, quantity demanded increases a lot.
In other words, the amount people buy is sensitive to price.
An ELASTIC demand curve is flat!
Examples:
Soda
Boats
Beef
Real Estate
Pizza
Gold
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9. General Characteristics of Elastic Goods:
Elastic Demand
General Characteristics of Elastic Goods:
Many Substitutes
Luxuries
Large portion of income
Plenty of time to decide
Elasticity coefficient greater than 1
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10. Elastic or Inelastic? What about the demand for insulin for diabetics?
Beef-
Gasoline-
Real Estate-
Medical Care-
Electricity-
Gold-
Elastic- 1.27
INelastic - .20
Elastic- 1.60
INelastic - .31
INelastic - .13
Elastic - 2.6
What if % change in quantity demanded equals % change in price?
Perfectly INELASTIC
(Coefficient = 0)
Unit Elastic (Coefficient =1)
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11. Elasticity Visualized
Perfectly
Inelastic
Elasticity
Coefficient 0
Relatively
Inelastic
Elasticity
Coefficient <1
Unit
Elastic
Elasticity
Coefficient1
Relatively
Elastic
Elasticity
Coefficient >1
Perfectly
Elastic
Elasticity
Coefficient ∞
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12. Total Revenue (P x Q)
Relatively Inelastic
Relatively Elastic S1 S1 S S D D
Quantity for each will decrease
TR for inelastic good will increase. TR for elastic good will decrease.
What happens to quantity for each when price increases?
What happens to total revenue for each when price increases?
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13. Total Revenue Test
Uses elasticity to show how changes in price will affect total revenue (TR).
Ex: If the demand for gas is inelastic, what will happen to total revenue for gas stations if price increases?
Inelastic Demand-
Price increase causes TR to increase
Price decrease causes TR to decrease
Elastic Demand-
Price increase causes TR to decrease
Price decrease causes TR to increase
Unit Elastic-
Price changes and TR remains unchanged
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14. Is the range between A and B, elastic, inelastic, or unit elastic?
10 x 100 =$1000 Total Revenue
5 x 225 =$1125 Total Revenue A
Price decreased and TR increased, so…
Demand is ELASTIC
50% B
125%
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15. B
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16. Other Types of Elasticity
Cross-Price Elasticity of Demand
Income Elasticity of Demand
Price Elasticity of Supply

17. Cross-Price Elasticity of Demand
Cross-Price elasticity of demand shows how sensitive a product is to a change in price of another good
It shows if two goods are substitutes or complements
% change in quantity of product “b”
% change in price of product “a”
P increases 20%
Q increases 40%
Q decreases 40%
If coefficient is positive (shows direct relationship) then the goods are substitutes
If coefficient is negative (shows inverse relationship) then the goods are complements
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18. 2008 udit Question 34

19. 2010 Question 6 B
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20. Income-Elasticity of Demand
Income elasticity of demand shows how sensitive a product is to a change in INCOME
It shows if goods are normal or inferior
% change in quantity
% change in income
Income increases 20%, and quantity decreases 15% then the good is a…
INFERIOR GOOD
If coefficient is positive (shows direct relationship) then the good is normal
If coefficient is negative (shows inverse relationship) then the good is inferior
Ex: If income falls 10% and quantity falls 20%…
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21. Practice Questions
1. If the cross price elasticity coefficient of goods A and B is -5 and the income elasticity of good A is 2, which of the following is true?
A decrease in the price of good A will decrease the demand for good B
An increase in income will decrease the demand for good A
Goods A and B are substitutes
Good B is an inferior good
An increase in the price of A will decrease the demand for good B
Answer E
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22. Price Elasticity of Supply
Elasticity of supply shows how sensitive producers are to a change in price.
Elasticity of supply is based on time limitations.
Producers need time to produce more.
INelastic = Insensitive to a change in price (Steep curve)
Most goods have INelastic supply in the short-run
Elastic = Sensitive to a change in price (Flat curve)
Most goods have elastic supply in the long-run
Perfectly Inelastic Supply= Q doesn’t change Set quantity supplied (Vertical line)
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23. Practice Questions
1. Which of the following must be true for original Michelangelo sculptures?
The demand is relatively elastic
The supply is perfectly elastic
The demand is perfectly inelastic
The supply is perfectly inelastic
The demand is perfectly elastic
Answer D- The quantity is set. It doesn’t matter if price increases or decreases, the quantity will be the same.
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