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.

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Presentation Transcript

The law of demand
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
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
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
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
    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
    Handouts

    • Elasticity Scenarios

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

    • Justify your decisions with sound economic reasoning.


    Demand curves
    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
    Inelastic Demand

    • Price change has little or no effect on QD.

    • Line will be steep!


    E lastic demand
    Elastic Demand

    • Price change has a huge change on QD.

    • Line will be more gradual!


    Total revenue test
    Total Revenue Test

    • Elasticity of Demand

    • I will help you with the first one.