1. Elasticity of Demand 3.3 Elasticity of Demand—is the degree to which changes in a good’s price affect the quantity demanded by consumers. Elastic Demand—Exists when a small change in a goods price causes a major opposite change in the quantity demanded. Elastic if: 1. Product is not a necessity 2. There are readily available substitutes 3. Products cost is a large portion of consumers income

2. Elastic Demand 3.3 Ex. Pizza: 1. Not a necessity 2. Available substitutes(sandwiches, tacos) Student’s income—larger portion Elastic/Inelastic Demand?

3. Inelastic Demand 3.3 Inelastic Demand—Exists when a change in a good’s price has little impact on the quantity demanded. Inelastic demand if: 1. The product is a necessity 2. There are few or no substitutes 3. Products cost is small portion of consumers income.

4. Inelastic Demand 3.3 Ex. Salt: Why? 1. Necessity 2. Has few substitutes 3. Does not represent large portion of income Elastic/Inelastic? Why?

5. Elasticity in Markets 3.3 Specific or General Product Market— Do you look at the overall big picture or the specific picture? Flour example: Overall flour market increases prices— inelastic because necessity, no subs, not overly expensive. Basha’s raises price of flour but others don’t—Flour at Basha’s is elastic

6. Measuring Elasticity 3.3 Total Revenue—Total income that a business receives for selling its products. Monitor income after price changes can determine a products elasticity. Total Revenue and elastic demand— Ex. Harkins raises prices from $8.50 to $9.00 Price/Ticket up but total revenue down

7. Total Revenue/Inelastic Demand A rise in a business’s total revenue because of a price increase indicates inelastic demand for business good or service. Ex. Harkins $8.50 to $9.00 and revenue increases.

8. Maximizing Total Revenue 3.3 See Figure 3.6 Transparency At what point is revenue maximized?