1. ELASTICITY A concept used by economists to measure the responsiveness of people to changes in economic variables. A concept used by economists to measure the responsiveness of people to changes in economic variables.

2. ELASTICITY If people are very responsive to changes in economic variables, the measure is said to be elastic or highly elastic. If people are very responsive to changes in economic variables, the measure is said to be elastic or highly elastic. If people are not very responsive to changes in economic variables, the measure is said to be inelastic. If people are not very responsive to changes in economic variables, the measure is said to be inelastic.

3. PRICE ELASTICITY OF DEMAND How much more of a product will a consumer buy when the product price decreases.How much more of a product will a consumer buy when the product price decreases. How much less of a product will a consumer buy when the product price increases.How much less of a product will a consumer buy when the product price increases. What is the responsiveness of consumers to changes in price.What is the responsiveness of consumers to changes in price.

4. PRICE ELASTICITY OF DEMAND percentage change in quantity demanded E d = -------------------------------------------- percentage change in quantity demanded E d = -------------------------------------------- percentage change in price percentage change in price Percentage change in price equals the absolute change in price divided by the initial price;Percentage change in price equals the absolute change in price divided by the initial price; Percentage change in quantity equals the absolute change in quantity divided by the initial quantity.Percentage change in quantity equals the absolute change in quantity divided by the initial quantity.

5. PRICE ELASTICITY OF DEMAND If the price of milk increases from $2.00/quart to $2.20/quart, andIf the price of milk increases from $2.00/quart to $2.20/quart, and the resulting quantity demanded changes from 100 million gallons of milk to 85 gallons of milk,the resulting quantity demanded changes from 100 million gallons of milk to 85 gallons of milk, what is the elasticity of demand for milk ?what is the elasticity of demand for milk ?

6. PRICE ELASTICITY OF DEMAND % change Quantity E d = -------------------------------------- % change Price % change Quantity E d = -------------------------------------- % change Price (New Quantity - Original Quantity) / (Original Quantity) E d = ---------------------------------------------------------------- (New Price - Original Price) / (Original Price) (New Quantity - Original Quantity) / (Original Quantity) E d = ---------------------------------------------------------------- (New Price - Original Price) / (Original Price)

7. PRICE ELASTICITY OF DEMAND (85 -100) / 100 -15 / 100 E d = ------------------------------ = ------------------------------ $2.20 -$2.00) / $2.00 $0.20 / $2.00 (85 -100) / 100 -15 / 100 E d = ------------------------------ = ------------------------------ $2.20 -$2.00) / $2.00 $0.20 / $2.00 E d = 15% / 10% = 1.50Demand is elastic.E d = 15% / 10% = 1.50Demand is elastic. PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.20 $2.00 85100 Market Demand Curve

8. PRICE ELASTICITY OF DEMAND Midpoint (More Precise) Approach % change Quantity E d = ----------------------------- % change Price % change Quantity E d = ----------------------------- % change Price (New Quantity - Original Quantity) / (Average Quantity) E d = --------------------------------------------------------------- - (New Price - Original Price) / (Average Price) (New Quantity - Original Quantity) / (Average Quantity) E d = --------------------------------------------------------------- - (New Price - Original Price) / (Average Price)

9. PRICE ELASTICITY OF DEMAND Midpoint (More Precise) Approach [ (85 - 100) ÷ (85 +100) ] / 2 E d = ------------------------------------- [ ($2.20 - $2.00) ÷ ($2.20 + $2.00) ] / 2 [ (85 - 100) ÷ (85 +100) ] / 2 E d = ------------------------------------- [ ($2.20 - $2.00) ÷ ($2.20 + $2.00) ] / 2 -15 / 92.5 16.22% E d = ---------------------------- = -------------------------- = 1.70 Demand is elastic. $0.20 / $2. 9.52% -15 / 92.5 16.22% E d = ---------------------------- = -------------------------- = 1.70 Demand is elastic. $0.20 / $2. 9.52% PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.20 $2.00 85100 Market Demand Curve

10. THREE ELASTICITY GROUPS OF CONSUMER DEMAND GROUP QUANTITY TO PRICE RELATIONSHIP VALUE ELASTICPercentage change in quantity > 1 greater than percentage change in price. INELASTICPetrcentage change in quantity < 1 less than percentage change in price. UNIT Percentage change in quantity =1 ELASTICequal to percentage change in price.

11. PRICE ELASTICITY AND SUBSTITUTES NO GOOD SUBSTITUTES --NO GOOD SUBSTITUTES -- Consumers are not very responsive to changes in price; Consumers are not very responsive to changes in price; Example:insulin for diabetics; Example:insulin for diabetics; Price elasticity of demand is inelastic. Price elasticity of demand is inelastic. MANY SUBSTITUTES --MANY SUBSTITUTES -- Consumers will readily switch to alternative product for small price changes; Consumers will readily switch to alternative product for small price changes; Example:cornflakes; Example:cornflakes; Price elasticity of demand is elastic. Price elasticity of demand is elastic.

12. Estimated Price Elasticities of Demand for Selected Products PRODUCTELASTICITY PRODUCTELASTICITY salt0.1 salt0.1 water0.2 water0.2 coffee0.3 coffee0.3 cigarettes0.3 cigarettes0.3 shoes and footware0.7 shoes and footware0.7 housing1.0 housing1.0 automobiles1.2 automobiles1.2 foreign travel1.8 foreign travel1.8 restaurant meals2.3 restaurant meals2.3 air travel2.4 air travel2.4 motion pictures3.7 motion pictures3.7 specific brands of coffee5.6 specific brands of coffee5.6

13. Other Determinants of Demand Elasticity TIME -TIME - Greater time permits finding more substitutes; consequently, elasticity of demand increases with time: Greater time -- greater elasticity. Greater time permits finding more substitutes; consequently, elasticity of demand increases with time: Greater time -- greater elasticity. PERCENTAGE OF BUDGET -PERCENTAGE OF BUDGET - The smaller the price of a product with respect to the size of the household budget, the more inelastic will be the product demand. The smaller the price of a product with respect to the size of the household budget, the more inelastic will be the product demand. NECESSITIES VERSUS LUXURIES - NECESSITIES VERSUS LUXURIES - The greater the need for a product, the more inelastic will be the product demand. The greater the need for a product, the more inelastic will be the product demand.

14. Elasticity Along a Linear Demand Curve PRICE$$ QUANTITY CONSUMED PER DAY 80 76 1012 Elasticity = 4 = (20% / 5%) 50 46 25 27 20 16 40 42 Elasticity = 1.0 = (8% / 8%) Elasticity = 0.25 = (5% / 20%)

15. Elasticity Along a Linear Demand Curve PRICE$$ QUANTITY CONSUMED PER DAY 80 76 1012 Elasticity = 4 : ELASTIC 50 46 25 27 20 16 40 42 Elasticity = 1.0 : UNIT ELASTIC Elasticity = 0.25 : INELASTIC

16. Using Elasticity of Demand to Calculate Change in Quantity Demanded GIVEN: Elasticity of Demand;Elasticity of Demand; Percentage change in Price;Percentage change in Price; E d = % change Quantity ÷ % change Price;E d = % change Quantity ÷ % change Price; Percentage change in quantity may be calculated from the two known values: % change Quantity = E d x % change Price% change Quantity = E d x % change Price

17. Using Elasticity of Demand to Predict changes in Total Revenue DEMANDPRICETOTAL REVENUE DEMANDPRICETOTAL REVENUE ElasticIncreaseDeclines ElasticIncreaseDeclines ElasticDecreaseIncreases ElasticDecreaseIncreases (A negative relationship exists between price and total revenue for an elastic demand.) InelasticIncreaseIncreases InelasticIncreaseIncreases InelasticDecreaseDeclines InelasticDecreaseDeclines (A positive relationship exists between price and total revenue for an inelastic demand.)

18. PRICE ELASTICITY OF SUPPLY How much more of a product will a producer make when the product price increases.How much more of a product will a producer make when the product price increases. How much less of a product will a producer make when the product price drops.How much less of a product will a producer make when the product price drops. What is the responsiveness of producers to changes in price.What is the responsiveness of producers to changes in price.

19. PRICE ELASTICITY OF SUPPLY percentage change in quantity supplied E d = ---------------------------------------- percentage change in price percentage change in quantity supplied E d = ---------------------------------------- percentage change in price Percentage change in price equals the absolute change in price divided by the initial price;Percentage change in price equals the absolute change in price divided by the initial price; Percentage change in quantity equals the absolute change in quantity divided by the initial quantity.Percentage change in quantity equals the absolute change in quantity divided by the initial quantity.

20. PRICE ELASTICITY OF SUPPLY If the price of milk increases from $2.00/quart to $2.20/quart, andIf the price of milk increases from $2.00/quart to $2.20/quart, and the resulting quantity supplied changes from 100 million gallons of milk to 120 gallons of milk,the resulting quantity supplied changes from 100 million gallons of milk to 120 gallons of milk, what is the elasticity of supply for milk ?what is the elasticity of supply for milk ?

21. Elasticity of Supply % change Quantity E s = ------------------------------- % change Price ; % change Quantity E s = ------------------------------- % change Price ; (New Quantity - Original Quantity) / (Average Quantity) E s = ------------------------------------------- -- (New Price - Original Price) / (Average Price) (New Quantity - Original Quantity) / (Average Quantity) E s = ------------------------------------------- -- (New Price - Original Price) / (Average Price)

22. Elasticity of Supply (20 /110) E s = ------------------------- = 20% /10% = 2.0 ( $0.20 / $2.10) (20 /110) E s = ------------------------- = 20% /10% = 2.0 ( $0.20 / $2.10) Supply is elastic; PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.20 $2.00 Market Supply Curve 100 120

23. PRICE ELASTICITY OF SUPPLY Increases with time;Increases with time; Limitations of production facilities in the short run prevent firms from responding with as much output increase as price increases;Limitations of production facilities in the short run prevent firms from responding with as much output increase as price increases; As firms can increase production facilities, in the longer run, the larger will be the increase in quantity supplied.As firms can increase production facilities, in the longer run, the larger will be the increase in quantity supplied.

24. Predicting Price Changes Using Elasticities An increase in demand (i.e., rightward shift): results in shortage at original price (demand exceeds supply); results in shortage at original price (demand exceeds supply); establishes market equilibrium at higher price, and quantity between original equilibrium quantity and quantity consumers now willing to buy at original price;establishes market equilibrium at higher price, and quantity between original equilibrium quantity and quantity consumers now willing to buy at original price; encourages producers to supply more and consumers to buy less.encourages producers to supply more and consumers to buy less.

25. PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.00 100 Demand D 1 Supply S 1 150 shortage Demand D 2

26. Predicting Price Changes Using Elasticities With an increase in demand, the resulting equilibrium price increase will be: small if consumers and producers are very responsive to price changes (elastic demand and elastic supply) ;small if consumers and producers are very responsive to price changes (elastic demand and elastic supply) ; larger if either is not very responsive (i.e., inelastic);larger if either is not very responsive (i.e., inelastic);

27. PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.00 100 Demand D 1 Supply S 1 130 $2.05 Demand D 2 originalequilibrium newequilibrium

28. Predicting Price Changes Using Elasticities With an increase in demand, the resulting percentage change in price can be found by: Percentage change in price = Percentage change in demand ------------------------------------------- (E s + E d )Percentage change in price = Percentage change in demand ------------------------------------------- (E s + E d )

29. Predicting Price Changes Using Elasticities With an increase in supply, the resulting percentage change in price can be found by: Percentage change in price = Percentage change in supply ------------------------------------------- (E s + E d )Percentage change in price = Percentage change in supply ------------------------------------------- (E s + E d )

30. Predicting Price Changes Using Elasticities An increase in supply (i.e., rightward shift): results in excess at original price (supply exceeds demand);results in excess at original price (supply exceeds demand); establishes market equilibrium at lower price, and quantity between original equilibrium quantity and quantity producers now willing to supply at original price;establishes market equilibrium at lower price, and quantity between original equilibrium quantity and quantity producers now willing to supply at original price; encourages producers to supply less and consumers to buy more.encourages producers to supply less and consumers to buy more.

31. PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.00 100 Demand D 1 Supply S 1 Supply S 2

32. Predicting Price Changes Using Elasticities With an increase in supply, the resulting equilibrium price decrease will be: small if consumers and producers are responsive to price changes (elastic demand and elastic supply) ;small if consumers and producers are responsive to price changes (elastic demand and elastic supply) ; larger if either is not very responsive (i.e., inelastic);larger if either is not very responsive (i.e., inelastic);

33. PRICE OF MILK $$ Millions of Gallons of Milk per Year $2.00 100 Demand D 1 Supply S 1 110 Supply S 2 $1.80 originalequilibrium newequilibrium