1. Chapter 4 : Lesson 3 Elasticity of Demand

2. Essential Question:
What factors determine a product’s demand elasticity?

3. Elasticity of Demand : is a measure of how consumers respond to price changes
Measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls

4. Inelastic: If you buy the same amount or just a little bit less of a good after a large price increase, your demand is Inelastic (price changes don’t matter)

6. Elastic: If you buy much less of a good after a small price increase, your demand is Elastic (very responsive to price changes)

7. 4. Factors that Affect Elasticity

8. 1. Availability of Substitutes
- If there are few substitutes for a good, then even when its price rises greatly, you might still buy it – you believe there are no good alternatives: your demand is inelastic

9. 2. Relative Importance
- How much of your budget do you spend on the good? The higher the jump in price, the more you will have to adjust your purchases

10. 3. Necessities v. Luxuries
- a necessity is a good people will always buy, even when the price increases (demand is inelastic)
ex: milk
- a luxury can easily be given up (demand is elastic)
ex: steak

11. 4. Change over Time
- Consumers often need time to change their spending habits, because it takes time to find substitutes
ex: gas

12. Total Revenue: is the amount of money the company receives by selling its goods
Determined by 2 factors:
Price of goods
Quantity of goods sold

13. Total Revenue & Elastic Demand
When a good has an elastic demand, raising the price of each good sold by 20% can decrease the quantity sold by enough to reduce the firm’s total revenue (setting prices too high/low can hurt $$)
Price of a Slice of Pizza
Quantity Demanded (per day)
Total Revenue
$1.00
300
$300.00
$2.00
250
$500.00
$3.00
200
$600.00
$4.00
150
$5.00
100
$6.00 50

14. Elasticity and Revenue
ELASTIC DEMAND
As the price is raised…
Total revenue rises
As the price is lowered…
Total revenue falls
INELASTIC DEMAND
As the price is lowered
Total revenue falls
As the price is raised..
Total revenue rises

15. Effect of a Price Change on Quantity Demanded
Sum it up
Effect of a Price Change on Quantity Demanded
INELASTIC DEMAND
ELASTIC DEMAND
Not sensitive to price change
Substitutes not available
Less of income spent on good
Seen as necessity
No time to react in the short term
Very sensitive to price change
Substitutes available
More of income spent on good
Seen as luxury
Substitutes can be found in the long term

16. Factors that affect elasticity
Does the product have substitutes
Y= Elastic N=Inelastic
Importance - % of your budget
- expensive vs. inexpensive
expensive- elastic cheap-inelastic
Necessity vs Luxury (needs vs wants)
need-inelastic want-elastic

17. Which item is more Elastic?
6 pack of cola or a ten speed bicycle
A school t-shirt or a school yearbook
Medical services for a badly cut hand or medical services for a runny nose
Cheeseburger or air conditioning in Arizona in the summer
Air conditioning in AZ this summer or Air conditioning in AZ over the next few summers

18. Answers Reason 10 speed bicycle Expensive Many Subs School t-shirt
Runny nose
Cheeseburger
A/C next few summers
Expensive
Many Subs
Many subs/not a need
Many subs
Time to plan/subs

19. Review Question:
Chapter 4 : Lesson 3
Read pages and answer Review Questions on page 119. Hand in Google Class Room.