1. 1 Agribusiness Lessons LESSON 060102 Elasticity

2. 2 Objectives 1.Define elasticity, and explain why elasticity varies among products. 2.Explain highly elastic and inelastic. 3.Explain the concept of income elasticity of demand. 4.Demonstrate the ability to calculate the elasticity of demand and elasticity of supply.

3. 3 Terms b b elasticity b b highly elastic b b inelastic b b inferior goods b b normal goods b b unit elastic

4. 4 What is elasticity? Why does elasticity vary among products? Elasticity measures the responsiveness or sensitivity to a change in price.

5. 5 What is elasticity? Why does elasticity vary among products? A. According to the Law of Demand, as the price of corn rises, consumers will eat less corn. Elasticity wants to know how much less corn consumers will eat as a result of the price increase.

6. 6 What is elasticity? Why does elasticity vary among products? B. Needs (e.g., food and water) must be met regardless of their cost. Thus, needs will be less responsive to changes in price than wants. As a result, the demand curve for wants is more elastic than the demand curve for needs.

7. 7 What is elasticity? Why does elasticity vary among products? C. As the price of a substitute rises, the demand for the good or service also rises. Therefore, goods and services that have several available substitutes will be more sensitive to prices changes than goods and services that have few available substitutes. This means the demand curve is more elastic for goods and services with several substitutes.

8. 8 What is elasticity? Why does elasticity vary among products? D. When producers have a long time to adjust to price changes, they are more sensitive to the prices. Consequently, consumers with a long time to adjust will have a more elastic demand curve.

9. 9 What is highly elastic? What is inelastic? Goods and services can be classified based on the response of equilibrium quantity to changes in the price. A. A highly elastic good or service generally is not a necessity, so a slight change in price will result in a decrease in demand. Therefore, when a good or a service is highly elastic, very small increases in price will result in a large decrease in the quantity supplied of those goods and services.

10. 10 What is highly elastic? What is inelastic? A. A highly elastic (cont’d) 1. Luxury goods and services are often considered highly elastic. Small increases in the price of a luxury good or service ( e.g., dining at a restaurant) might result in a large decrease in the quantity demanded (i.e., the number of meals eaten at a restaurant).

11. 11 What is highly elastic? What is inelastic? A. A highly elastic (cont’d) 2. A dollar bill is an example of a perfectly elastic good. No one is willing to pay $1.01 for a dollar, but everyone would be willing to pay $0.99 for $1.

12. 12 What is highly elastic? What is inelastic? B. An inelastic good or service generally is a necessity, so changes in price affect quantity demanded only slightly, if at all. When a good or a service is inelastic, increases in price will result in a small decrease in the quantity supplied of those goods and services.

13. 13 What is highly elastic? What is inelastic? B. An inelastic good (cont’d) 1. Basic food goods are often considered inelastic goods. This is because everyone needs to consume these goods to sustain life, regardless of the cost. 2. When goods and services are more important and preferred, they are typically more inelastic.

14. 14 What is meant by income elasticity of demand? The responsiveness of the demand for a good or service when a person’s income changes are indicated by the income elasticity of demand. A. Normal goods are products that are more in demand as income increases. B. Inferior goods are products that are less in demand as income increases.

15. 15 What is meant by income elasticity of demand? C. Goods can be classified as elastic or inelastic based on their numeric elasticity. 1. Goods with elasticity equal to zero are called perfectly inelastic. 2. Goods with elasticity of less than zero but greater than –1 are called relatively inelastic. 3. Goods with elasticity equal to –1 are called unit elastic.

16. 16 What is meant by income elasticity of demand? C. Goods can be classified as elastic or inelastic (cont’d) 4. Goods with elasticity of less than –1 but greater than negative infinity are called relatively elastic. 5. Goods with elasticity equal to negative infinity are called perfectly elastic.

17. 17 How do you calculate the elasticity of demand and the elasticity of supply? To calculate elasticity, a person must take the percent change in quantity of the good or service divided by the percent change in the price of the good or service. A. To calculate the elasticity of demand, a person must divide the percent change in quantity demanded by the percent change in price.

18. 18 How do you calculate the elasticity of demand and the elasticity of supply? A. To calculate the elasticity of demand (cont’d) 1. First, a person must find the percent change in quantity. To calculate percent change in quantity, it is necessary to subtract the beginning quantity from the ending quantity and to divide that result by the average of the ending and beginning quantities. (Ending Q – Beginning Q)/[(Ending Q + Beginning Q)/2]

19. 19 How do you calculate the elasticity of demand and the elasticity of supply? A. To calculate the elasticity of demand (cont’d) 2. Next, a person must find the percent change in price. To calculate percent change in price, it is necessary to subtract the beginning price from the ending price and to divide that result by the average of the ending and beginning prices. (Ending P – Beginning P)/[(Ending P + Beginning P)/2] 3. Finally, a person must divide the result from Calculation 1 by the result from Calculation 2.

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21. 21 Review b b Which demand curve is more elastic the one for wants or needs? b b Name something that is perfectly elastic. b b Are basic foods elastic or inelastic? b b How do you calculate elasticity of demand?