ELASTICITY OF DEMANDCh 4, s3 – pages 92-98 How flexible is consumer demand?
WARM-UP • ON A SCALE OF 1 TO 10, 1 BEING LEAST AND 10 BEING MOST IMPORTANT, HOW IMPORTANT ARE THE FOLLOWING RESOURCES TO YOU AS A CONSUMER? • WATER • GASOLINE • BRUSTERS ICE CREAM • TACO BELL • YOUR HAIRDRESSER
Demand Elasticity • Demand Elasticity: a measure of how changes in price causes changes in Quantity Demanded. How will a price change influence a consumer’s decision to buy? • EXAMPLE: Lobster Tails • Usually priced at $12 each • Price lowered to $9 each • How will the price change impact Quantity Demanded? • Will people buy the same amount of lobster or more lobster because of the price change? • Demand Elasticity illustrates how price changes influence consumer behavior!!! 3
Elastic Demand • Elastic Demand : a change in price causes a large change in quantity demanded (how much of a good or service consumers purchase) • EXAMPLE: MacBookAir (Apple laptop) • MacBook Air (Apple laptop) sells for $1,300 • Best Buy will usually sell one MacBookAir a day • Best Buy offers the product for 15% off, reducing the price to $1,105. Best Buy sells three MacBooks before lunch the first day of the sale. 4
Inelastic Demand (NOT elastic) • Inelastic Demand (NOT elastic): a change in price causes LITTLE or NO CHANGE in the quantity demanded • EXAMPLE: Gas Prices • Regular gas is $3.96 per gallon • Prices jump the following week to $4.15 agallon, an increase of 5% • Sales of gasoline at Sunoco remain constant from week 1 to week 2, despite the increase in price. 5
Determining Demand Elasticity Determinants of Demand • Can the purchase be delayed? • Are adequate substitutes available? • Does the purchase use a large portion of income?
Total Receipts or Total Revenue: Price x Quantity Sold Would this business owner make more money by raising t-shirt prices? Is consumer demand Elastic or Inelastic? 9
Total Receipts or Total Revenue: Price x Quantity Sold Would this business owner make more money by raising prices of bags? Is consumer demand Elastic or Inelastic?