Elasticity of Demand

Warm Up: Give an example of what would cause a demand shift.

What affects Quantity Demanded?What affects Quantity Demanded? What affects Demand?What affects Demand? If the price of snickers increases what will happen If the price of snickers increases what will happen

to the demand for twix? What caused the change to the demand for twix? What caused the change in demand?in demand?

You just get a new high paying job, what kind of You just get a new high paying job, what kind of goods would be more likely buy now?goods would be more likely buy now?

More people enter the country what will happen to More people enter the country what will happen to demanddemand

Elasticity of Demand Elasticity of Demand—is the degree to which

changes in a good’s price affect the quantity demanded by consumers.

Elastic- Exists when a small change in a goods price causes a major opposite change in the quantity demanded. P Q

Inelastic- Exists when a change in a good’s price has little impact on the quantity demanded. P Q

Elastic Demand Elastic Demand— Exists when a small

change in a goods price causes a major opposite change in the quantity demanded.

P Q Elastic if: 1. Product is not a necessity

2. There are readily available substitutes 3. Products cost is a large portion of

consumers income

Elastic Demand Ex. Pizza:

1. Not a necessity 2. Available substitutes(sandwiches, tacos) Student’s income—larger portion Elastic/Inelastic Demand?

Inelastic Demand Inelastic Demand— Exists when a change in a

good’s price has little impact on the quantity demanded.

P Q Inelastic demand if:

1. The product is a necessity 2. There are few or no substitutes 3. Products cost is small portion of consumers

income.

Inelastic Demand Ex. Salt: Why?

1. Necessity 2. Has few substitutes 3. Does not represent large portion of income Elastic/Inelastic? Why?

Elasticity in Markets Specific or General Product Market—

Do you look at the overall big picture or the specific picture? Flour example: Overall flour market increases prices—

inelastic because necessity, no subs, not overly expensive.

Basha’s raises price of flour but others don’t—Flour at Basha’s is elastic

Inelastic – Necessities or addictions Name some products that would be inelastic Housing, electricity, bread, telephone service, eggs,

clothing, milk, gasoline, tobacco and alcohol Elastic - Luxuries

Name some products that would be elastic Restaurant meals, going to the movies, entertainment, big

vacations The slope of the demand curve is affected

Steep demand curves are inelastic Flat demand curves are elastic 45 degree is unit elastic or unitary

E = (% change in quantity demanded) / (% change in price)

E > 1 - elastic 1+ E < 1 - inelastic less than 1 E = 1 - unit elastic Vertical Demand Curve: is perfectly inelastic Horizontal Demand Curve: is perfectly elastic

1. Little responsiveness to price describes a(n) ________ good.

2. What is the formula for elasticity of demand?

3. What makes goods more elastic?

4. Give three examples of an inelastic good.

5. Give three examples of an elastic good.

6. What is the slope of a perfectly elastic good?

7. Elasticity of a unitary good is ______________.

8. If a good makes up a small portion of your budget it is most likely an ___________ good.

9. How does elasticity affect a firms total revenue?

Case Study Analysis Directions: In this case study, you will be examining the company,

“Not Your Daughter’s Jeans” and one of their leading products, Tummy Tuck Jeans. After reviewing the case study information below, watch the Paul Solman news segment and look for the explanations of the following concepts. Then discuss and answer the questions below.

Case Study Information: Company: Not Your Daughter’s Jeans (NYDJ), based in Los Angeles,

California Featured Product: Tummy Tuck Jeans Market Coverage: U.S. and North America, Australia, New Zealand,

Germany, France, Scandinavian countries, UK, Ireland Target market: Women over 40 years-old Suggested Retail Price: $100

Important economic concepts involving this product: 1. Economic downturn in United States: Over the past year, the U.S. economy

slid into a severe recession. Unemployment is markedly up and stocks and investments have plummeted. Financial sector has been reeling from bank closures and major industries like automobiles and related companies have filed for bankruptcy.

Question: What should be the effect on sales of Tummy Tuck Jeans at $100/pair in this difficult economic climate?

______________________________________________________________ Question: According to the news segment, what steps would a company like

NYDJ normally take to “cut corners” and survive in this type of economic climate?

______________________________________________________________

2. Weak U.S. dollar: In recent years, the U.S. dollar has become less valuable than many foreign currencies. In other words, it takes more U.S. dollars to match the unit of currency (yen, Euro, krona, etc.) in a foreign country.

Question: How has a weak U.S. dollar affected sales of Tummy Tuck Jeans in foreign countries?

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Question: How has this expansion into foreign markets affected the company’s growth?

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3. Serving a “niche market:” NYDJ’s Tummy Tuck Jeans serves a niche market of women over 40 years old.

Question: According to George Rudes, CEO of NYDJ, why are women over 40 the target market for Tummy Tuck Jeans?

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Income Elasticity of Demand: This measures how flexible your demand for a product is to economic changes. If money is tight and the price doesn’t change, you will buy less. If cheaper substitutes are available, you’ll buy those instead. If your economic condition is good, price won’t be as great a factor and you will buy more. Example: In good economic times, you might buy steak. In poor economic times you’re more likely to buy hamburger.

“Inelastic demand” measures how inflexible your demand is to a product as a market changes. For products where demand is in-elastic, you don’t necessarily buy less as your income lowers. This is especially true for items that are in high demand, are scarce with few substitutes, and/or are a necessity. Example: Gasoline consumption stays steady or declines only slightly even when price raises and/or people’s income declines.

Question: According to the news report, is demand for Tummy Tuck Jeans elastic or in-elastic in declining economic conditions?

_______________________________________

Question: What do you account for this situation? ________________________________________