1. Learning Objective: – Today I will be able to determine elasticity of demand by calculating price changes in consumer goods. Agenda: 1.Learning Objective 2.Lecture: Ch. 4.2 Elasticity of Demand 3.Worksheet 4.Exit Slip CONTEMPORARY ECONOMICS: LESSON 4.2 1

2. Elasticity: – Consumer responsiveness to price change. Elasticity of demand measures the percentage change in quantity demanded divided by percentage change in price. CONTEMPORARY ECONOMICS: LESSON 4.2 2 Elasticity of demand % change in quantity demanded %change in price Title: Ch. 4.2 Elasticity of Demand

3. The Demand for Pizza CONTEMPORARY ECONOMICS: LESSON 4.2 3 814202632 Millions of pizzas per week $15 12 9 6 3 0 Price per pizza D

4. Checking for Understanding 1.Pizza falls from $12 to $9—How much did it decrease? 2.Since pizza price change, quantity demand rose from 6 million to 14 million—How much more was demanded? 3.Calculate % of price change & quantity demanded. 4.Elasticity of demand= CONTEMPORARY ECONOMICS: LESSON 4.2 4 % change in quantity demanded %change in price

5. – Demand is: Elastic if great than 1.0 Unit elastics= 1.0 Inelastic if between 0 and 1.0 Lowering prices – Lowers total revenue for each unit sold. – Quantity demanded increases, which may increase total revenue Check for Understanding: So then what is the elasticity of pizza since it’s price decreased? CONTEMPORARY ECONOMICS: LESSON 4.2 5

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7. What does the elasticity of demand measure? The elasticity of demand measures the percentage change in quantity demanded divided by the percentage change in price. CONTEMPORARY ECONOMICS: LESSON 3.3 7 Checkpoint: pg.112 Elasticity of demand Percentage change in quantity demanded Percentage change in price

8. Determinants of Demand Elasticity – Availability of substitutes Less elastic if not many substitutes. More elastic if more substitutes available. – Consumer’s budget & importance of item What consumer’s are willing & able to buy Ex. Increase in houses, less is demanded, more responsive. Ex. Less responsive to crease in paper towels, not as important as a house. – Time Need more time to find substitutes Ex. In 1973 & 1974, the OPEC oil cartel raised prices of oil by 45%. At first consumption decreased by 8%. But, furthered decreased with more time. – Elasticity of demand, greater at the long-run than short-run. CONTEMPORARY ECONOMICS: LESSON 4.2 8

9. Demand Becomes More Elastic Over Time CONTEMPORARY ECONOMICS: LESSON 4.2 9 507595100 Millions of gallons per day 0 $1.25 1.00 Price per gallon D y D m D w

10. Selected Elasticities of Demand Product Short Run Long Run Electricity (residential)0.11.9 Air travel0.12.4 Medical care and hospitalization0.30.9 Gasoline0.41.5 Movies0.93.7 Natural gas (residential)1.42.1 CONTEMPORARY ECONOMICS: LESSON 4.2 10

11. What are the determinants of demand elasticity? ? Availability of substitutes consumer’s budget time Some elasticity estimates CONTEMPORARY ECONOMICS: LESSON 3.3 11 Checkpoint: pg.115

12. Exit Slip What is a good or service you consume? Is it elastic, inelastic, or unit elastic? Explain how do you know? CONTEMPORARY ECONOMICS: LESSON 4.2 12