chapter 4 section 2. salt 2015 nissan gtr pork chops insulin (you’re diabetic) gas one day...
TRANSCRIPT
ELASTICITY OF DEMAND
Chapter 4 section 2
50% increase in price of:
Salt
2015 Nissan GTR
Pork chops
Insulin (you’re diabetic)
Gas one day after price increase
Gas one year after price increase
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 demandedDemand % change in price
What is Elasticity of Demand?
If the demand is not very sensitive to a change in price it is inelastic
If the demand is very sensitive to a change in price it is elastic
DP
Q
D
P
Q
P1
Q1 Q2
P2 =
What Four Factors Determine Elasticity of Demand?
1. Number of substitutes2. Luxuries versus necessities3. Percentage of income spent on the good4. Time to adjust to the price change
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
Availability of Substitutes If your favorite musical group has
a concert and you want to attend, there really is no substitute for a ticket
Is a moderate change in price is not going to change your mind. Is your demand elastic or inelastic?
Inelastic
DP
Q
2. Luxuries versus Necessities
Do you need it to survive? Heart medicine tends to be inelastic Coach purses tend to be elastic
3. % 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
QQ1
P1
Q2
P2 D
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
QQ1
P1
Q2
P2
4. Time to Respond Price Change
Because consumers cannot respond quickly to price changes, their demand is inelastic in the short term
When a price changes, consumers often need time to change their shopping habits or find a substitute. Demand is elastic in the long run.
Why is Elasticity Important?
Tells business owners how much a change in price will affect the bottom line
Elasticity and Revenue
A company’s total revenue is the amount of money the company receives by selling its goods
Total revenue= price of goods X quantity sold
Price Elasticity and the Total Revenue Test
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
Price Quantity sold
Total Revenue
July 2.50 200 500
August 3.00 100
Price Elasticity and the Total Revenue Test
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
Price Quantity sold
Total Revenue
July 2.50 200 500
August 3.00 175
Movies tend to be unit-elastic
Unit-elastic means the % they increase the price is exactly equal to the % demand drops
trailer
Price Quantity sold
% change Qd% change price
Total Revenue
July 10 200 2000
August 15 100 1500
Students complete Activity 1 and 2 with a partner Get out ONE piece of paper—2 people, 1
paper DO NOT WRITE ON ACTIVITY 1! DO NOT WRITE ON ACTIVITY 2!