Elasticity

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Elasticity - PowerPoint PPT Presentation

Elasticity. of. Demand. Microecon – Unit 2 Part 3. You have a group of average consumers. Let’s say they all have a favorite gum…. which normally costs 50 ¢. Would most of these consumers still buy the gum if the price rose to 75 ¢?. Same group of consumers.

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Elasticity

of

Demand

Microecon – Unit 2 Part 3

You have a group of average consumers.

Let’s say they all have a favorite gum…

which normally costs 50¢.

Would most of these consumers still buy the gum if the price rose to 75¢?

Same group of consumers.

Some years they go on their favorite vacation with their wives…

...which normally costs \$1,000.

Would most of these consumers still go if the price rose to \$1500?

50¢ to 75¢

What’s the percentage change in the price for the gum?

\$1,000 to \$1,500

What’s the percentage change in the price for the vacation?

Economists examine this idea….

How will the demand for an item/service change when the price is changed?

If the price goes up…

will consumers buy the same amount?

will consumers buy less or none at all?

This is called….

Elasticity

Elasticity is the responsiveness of one variable to changes in another variable, ceteris parabis (other things equal).

Elasticity examines….will the quantity consumed change if the price goes up…or if the price goes down?

If the price goes up…

If the quantity demanded changes we call the demand elastic.

P

INELASTIC

P

ELASTIC

\$300

\$3

\$200

\$2

\$100

\$1

D

D

10 m

100

200

500

Q

Q

There are characteristics of goods/services that can make their demand tend to be more elastic or more inelastic.

Use your intuition to decide if each makes the demand more elastic or inelastic.

Copy this chart into your notes.

Elastic

Inelastic

1.

2.

3.

4.

5.

6.

Elastic

Inelastic

few substitutes

many substitutes

Will a change in the price of Dasani bottled water make a difference in the quantity demanded?

Elastic

Inelastic

1.

many substitutes

few substitutes

2.

3.

4.

5.

6.

Elastic

Inelastic

necessity

luxury

Will a change in the price of insulin make a difference in the quantity demanded?

Elastic

Inelastic

1.

many substitutes

few substitutes

luxury

necessity

2.

3.

4.

5.

6.

Elastic

Inelastic

inexpensive

expensive

Will a change in the price of pens make a difference in the quantity demanded?

Elastic

Inelastic

1.

many substitutes

few substitutes

luxury

necessity

2.

inexpensive

expensive

3.

4.

5.

6.

Elastic

Inelastic

habit-forming

non-habit forming

Will a change in the price of coffee make a difference in the quantity demanded?

Elastic

Inelastic

1.

many substitutes

few substitutes

luxury

necessity

2.

inexpensive

expensive

3.

non-habit forming

habit-forming

4.

5.

6.

Elastic

Inelastic

shorter time period

longer time period

Let’s say your refrig broke…would a change in the price of refrigs make a difference in the quantity demanded?

Elastic

Inelastic

1.

many substitutes

few substitutes

luxury

necessity

2.

inexpensive

expensive

3.

non-habit forming

habit-forming

4.

longer time period

shorter time period

5.

6.

In addition to characteristics of products that tend to make demand for them be more elastic or inelastic…

There is also the Total Revenue Test which will tell you if demand is elastic or inelastic.

Total Revenue =

price x

quantity

Let’s say there’s only one nail salon…

in town where you could adorn your nails with this lovely design…

..or the very popular French nail manicure…

Let’s say the nail salon changed the price of its manicures and found the following:

price

quantity

\$10

15

5

\$15

1

\$30

To apply the total revenue test, we see what happened to TR when P .

So what is total revenue?

Total Revenue=

price

x

quantity

\$10

15

\$150

\$75

\$15

5

\$30

\$30

1

With manicures, when the price went up the TR went down. So was the demand for manicures elastic (responsive) or inelastic?

Elastic

Inelastic

1.

many substitutes

few substitutes

luxury

necessity

2.

inexpensive

expensive

3.

non-habit forming

habit-forming

4.

longer time period

shorter time period

5.

Total revenue test Total revenue test

6.

P , TR 

P , TR 

P , TR 

P , TR 

Give 2 or 3 reasons to explain why demand for these products / services is more elastic or inelastic.

\$15.00

P

S

\$12.50

\$10.00

\$7.50

\$5.00

\$2.50

D coffee

10

20

30

40

50

Q

So why does it matter if demand is more elastic or more inelastic?

Which demand is relatively more inelastic?

\$15.00

P

S1

S

\$12.50

\$10.00

\$7.50

\$5.00

\$2.50

D coffee

10

20

30

40

50

Q

at P = \$7.50 how many cups of coffee are demanded? how many enchiladas?

Let’s say the gov’t imposed a tax on pound of coffee sold by mfg’s to stores & on every enchilada sold from distributors to restaurants. What shifts?

\$15.00

P

S1

S

\$12.50

\$10.00

\$7.50

\$5.00

\$2.50

D coffee

10

20

30

40

50

Q

\$10.00

20

Enchiladas P = ______ & Q = _______

Coffee P = ______ & Q = _______

\$11.00

28

\$15.00

P

S1

S

\$12.50

Because the demand for coffee is more _________, coffee makers are able to pass more of the _____ on to consumers.

\$10.00

inelastic

\$7.50

tax

\$5.00

\$2.50

D coffee

10

20

30

40

50

Q

\$10.00

20

Enchiladas P = ______ & Q = _______

Coffee P = ______ & Q = _______

\$11.00

28