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# Responding to Price Changes (Elasticity of Demand & Supply) - PowerPoint PPT Presentation

Responding to Price Changes (Elasticity of Demand & Supply). Lesson 2.5. The Law of Demand. The quantity demanded varies inversely with price, other things constant (a.k.a. Price Effect) Price = Quantity demanded Price = Quantity demanded. Elasticity of Demand.

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Responding to Price Changes (Elasticity of Demand & Supply)

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## Responding to Price Changes (Elasticity of Demand & Supply)

Lesson 2.5

### The Law of Demand

• The quantity demanded varies inversely with price, other things constant (a.k.a. Price Effect)

Price = Quantity demanded

Price = Quantity demanded

### Elasticity of Demand

• Law of Demand does not specify the degree to which the quantity demanded will change.

• Degree of Change = QD vs. Price Changes

• Demand is elastic if QD changes significantly as price changes.

• Demand is inelastic if QD changes little as price changes.

### Red Bull

• If price of Red Bull increased from \$2.00 to \$2.50, would you still purchase from the vending machine?

• At what price would you change your behavior?

• This is price elasticity – how producers and consumers react to a change in price.

### Elastic vs. Inelastic

• Rubber Band – doesn’t take much effort to change its shape. This means you are RESPONSIVE to price changes (elasticity).

• Pencil – takes much more effort to break the pencil than to change the shape of a rubber band. This means you are not RESPONSIVE to price changes (inelastic).

• ### Estimating Elasticity

• Salt – no substitutes, small portion of income, and a necessity. All of these say that SALT is considered INELASTIC.

• Sports Car – substitutes available, large portion of your income, and a luxury item. All of these say that a SPORTS CAR is considered ELASTIC.

### Handouts

• Elasticity Scenarios

• Will quantity demanded be elastic or inelastic? Which factors play a role?

• Justify your decisions with sound economic reasoning.

### Demand Curves

• Why do the curves look different?

• Talk to those around you and determine why they look different?

• Price elasticity can be zero if someone won’t buy a product.

• Reasons: cultural, health, environmental, political, moral, etc.

### Inelastic Demand

• Price change has little or no effect on QD.

• Line will be steep!

### Elastic Demand

• Price change has a huge change on QD.

• Line will be more gradual!

### Total Revenue Test

• Elasticity of Demand