1. Unit 3 Elasticity/Taxes
Chapter 6 Elasticity

2. I. Elasticity Shows how sensitive quantity is to a change in price.
Elasticity of Demand
Elasticity of Supply
Cross-Price Elasticity
Income Elasticity

3. II. Elasticity of Demand
Measure CONSUMERS responsiveness to a change in price.
Who cares?
Used by firms to help determine prices and sales
Used by government to decide how to tax.

4. III. Inelastic Demand Quantity if Insensitive to a change in price
Price Rises = quantity demanded falls very little.
Price Falls = quantity demanded increases very little.
People continue to buy no matter what
Inelastic demand curve is steep.
Examples
Gasoline
Milk
Diapers

5. IV. Inelastic Characteristics
Few Substitutes
Necessities
Small portion of income
Required now rather than later
Elasticity coefficient less than 1.

6. Inelastic Demand

7. V. Elastic Demand Quantity demanded is sensitive to a change in price.
If price rises = quantity demanded falls a lot.
If price falls = quantity demanded rises a lot.
Amount people buy is sensitive to price.
Examples:
Soda
Boats
Beef

8. VI. Elastic Characteristics
Many Substitutes
Luxuries
Large portion of income
Plenty of time to decide
Elasticity coefficient greater than 1

9. Elastic Demand

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)
45 Degrees

11. VII. Total Revenue Test
Uses elasticity to show how changes in price will affect total revenue (TR). (TR=Price x Quantity)
Elastic Demand
Price increase causes TR to decrease
Price decrease causes TR to increase
Inelastic Demand
Price increase causes TR to increase
Price decrease causes TR to decrease
Unit Elastic
Price changes and TR remains unchanged

12. VIII. Midpoint Method
Technique for calculating the percent change for calculating elasticities.

13. IX. Price Elasticity of Supply
Show how sensitive PRODUCERS are to change in price.
Mostly 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 change in price (flat curve)
Most goods have elastic supply in the long-run
Perfectly inelastic: Q doesn’t change (vertical line)
Set Quantity

14. X. Cross-Price Elasticity of Demand
Shows how sensitive a product is to a change in price of ANOTHER good
Shows if two goods are substitutes or complements
If coefficient is negative then goods are complements
If coefficient is positive then the goods are substitutes
% change in quantity of product “b”
% change in price of product “a”
Q decreases 15%
P increases 20%

15. XI. Income-Elasticity of Demand
Shows how sensitive a product is to a change in INCOME
Shows if two goods are normal or inferior
If coefficient is negative then the good is inferior
If coefficient is positive then the good is normal.
% change in quantity
% change in income
Income increases 20%, and quantity decreases 15% then the good is a…

16. An Elasticity Menagerie16

17. An Elasticity Menagerie17

18. (i)The price of tickets (ii)The quantity of tickets sold
1996 Micro FRQ #2
The Toledo arena holds a maximum of 40,000 people. Each year the circus performs in front of a sold out crowd.
(a) Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets.
(i)The price of tickets
(ii)The quantity of tickets sold
(b) The city of Toledo institutes an effective price ceiling on tickets. Explain where the price ceiling would be set. Explain the impact of the ceiling on each of the following.
(i) The quantity of tickets demanded
(ii) The quantity of tickets supplied
(c) Will everyone who attends the circus pay the ceiling price set by the city of Toledo. Why or why not? 18