1. ELASTICITY OF DEMAND Chapter 4 section 2

2. IF THERE’S A 50% INCREASE IN PRICE OF 1. Salt 2. 2015 Nissan GTR 3. Pork chops 4. Insulin (you’re diabetic) 5. Gas one day after price increase 6. Gas one year after price increase Would you still buy it? Why?

3. WHAT FOUR FACTORS DETERMINE ELASTICITY OF DEMAND? 1. Number of substitutes 2. Luxuries versus necessities 3. Percentage of income spent on the good 4. Time to adjust to the price change

4. WHAT IS ELASTICITY OF DEMAND?  Elasticity of demand dictates how drastically buyers will cut back when a price rises or increase their demand for a good when the price falls Elasticity of = % change in quantity demanded Demand % change in price P Q Q1Q1 P1P1 Q2Q2 P2P2 D

5. HOW IS ELASTICITY OF DEMAND MEASURED?  If the demand is very sensitive to a change in price it is elastic  If the demand is not very sensitive to a change in price it is inelastic D P Q D P Q P1P1 Q1Q1 Q2Q2 P2P2

6. 1. NUMBER OF SUBSTITUTES  A product with lots of substitutes tends to be elastic  A product with few or no substitutes tends to be inelastic P Q Q1Q1 P1P1 Q2Q2 P2P2 D

7. AVAILABILITY OF SUBSTITUTES CONT.  If your favorite musical group has a concert and you want to attend, there really is no substitute for a ticket  If a moderate change in price does not change your mind, is demand elastic or inelastic? Inelastic D P Q

8. 2. LUXURIES VERSUS NECESSITIES Do you need it to survive?  Heart medicine tends to be inelastic  Coach purses tend to be elastic

9. 3. PERCENT OF INCOME SPENT ON THE GOOD How expensive is it?  Buyers are more responsive to price changes for goods on which they spend a larger percentage of their income P Q Q1Q1 P1P1 Q2Q2 P2P2 D

10. PERCENTAGE OF INCOME SPENT ON THE GOOD CONT.  Buyers are less responsive to price changes for goods on which they spend a small percentage of their income  If the price of chewing gum doubled, would you cut back on buying gum?  Your demand for gum is inelastic D P Q Q1Q1 P1P1 Q2Q2 P2P2

11. 4. TIME TO RESPOND PRICE CHANGE  Because consumers cannot respond quickly to price changes, their demand is inelastic in the short term

12.  When a price changes, consumers often need time to change their shopping habits or find a substitute. Demand is elastic in the long run. 4. TIME TO RESPOND PRICE CHANGE CONT.

13. WHY IS ELASTICITY IMPORTANT? It tells business owners if raising their prices will result in a bigger total revenue Or A smaller total revenue Total revenue = price of goods X quantity sold

14. PRICE, ELASTICITY, AND TOTAL REVENUE  In July Joe’s Pizza sells pizza for $2.50 a slice and sells 200 slices per day.  In August Joe raises his prices from $2.50 to $3 per slice, then the amount he sells would decrease from 200 to 100 slices a day.  Increase in Price resulted in an Decrease in Total Revenue! Joe’s pizza is ELASTIC PriceQuantity sold Total Revenue July2.50200$500 August3.00100 $300

15.  If Price INcreases and Total Revenue DEcreases, then the good is… Elastic InelasticUnit-elastic for demand

16. PRICE, ELASTICITY, AND TOTAL REVENUE  John’s Pizza in Barrow, Alaska, also sells his pizza for $2.50 a slice and sells 200 slices a day.  If John raised his prices from $2.50 to $3 per slice, then the amount he sold would decrease from 200 to 175 slices a day.  Increase in Price resulted in an INcrease in Total Revenue! John’s Pizza is relatively INELASTIC for demand PriceQuantity sold Total Revenue July2.50200$500 August3.00175 $525

17.  If price INcreases and Total Revenue INcreases, then the good is… Elastic InelasticUnit-Elastic for demand

18. MOVIES TEND TO BE UNIT-ELASTIC  Unit-elastic means the % they increase the price is exactly equal to the % demand drops PriceQuantity sold % change Qd % change price Total Revenue July102002000 August201002000

19.  If price INcreases and Total Revenue Stays the Same, then the good is… Elastic InelasticUnit-Elastic for demand

20.  Students complete Activity 2 with a partner  Get out ONE piece of paper—2 people, 1 paper  DO NOT WRITE ON ACTIVITY 2! PriceTotal RevenueElasticity of Demand ↑↓Elastic ↓↑ ↑↑Inelastic ↓↓ ↑ or ↓═Unit-elastic