last word: ch 4 review due/quiz friday consider: as a business owner, should you raise or lower...
TRANSCRIPT
Last Word: Ch 4 Review due/Quiz Friday
Consider: As a business owner, should you raise or lower prices to generate more revenue? Why?
Price and Demand
We know that price is the most significant factor that influences demand Price up, demand down Price down, demand up LAW OF DEMAND…
But what about this…?
Why is he mad?
Why is the cartoon “ironic”?
What does this say about demand?
New question: HOW MUCH DOES DEMAND CHANGE WHEN PRICES CHANGE?
Depending on the product, and a few other factors
Does demand change a lot or a little in response to price changes?
ELASTICITY OF DEMANDChapter 4, Section 3
What is elasticity of demand?
• Elasticity of demand is a concept that describes HOW RESPONSIVE consumers are to price changes in the marketplace.
• Demand is elastic if quantity demanded changes significantly as price changes.
• Demand is inelastic if quantity demanded changes little as price changes.
For example… Items like expensive sports cars, or
name-brand jeans… Are susceptible to price changes; their
demand will change significantly when price changes
Other items, like bread or sugar… Their demand changes very little even when
price changes People still need them almost regardless of
price
There are 3 things you need to know about a product before you can know its “elasticity” First, whether there are readily
available (and roughly equivalent) substitutes
Second, whether the item takes a large portion of a person’s income
Third, whether the item is considered a necessity or a luxury
Factor #1 – Availability of Substitute Goods/Services
• If there is no substitute for a good or service, demand for it tends to be inelastic. (ex. insulin)
• People are, in a sense, forced to buy the product almost regardless of price, so demand doesn’t change very much even if price changes
Factor #1 – Availability of Substitute Goods/Services• However, if many substitutes are
available, demand tends to be elastic. (ex. beef)• People can go elsewhere and buy similar products
(that do basically the same thing) for less money
Factor #2 – Proportion of Income
• Demand for products that take up a significant portion of your income tends to be elastic.• Again, demand for these goods will change
greatly if price changes
Factor #2 – Proportion of Income
• Demand for products that take up little of your income tends to be inelastic.• They don’t cost you a lot, so you don’t think much
about buying less if price changes
Factor #3 – Necessities vs. Luxuries
• Demand for necessities tend to be inelastic. (addictive substances may fall under this category too.)• People need to buy these, so demand changes
very little when price changes, even reductions in price
Factor #3 – Necessity or luxury?• Demand for luxuries tend to be elastic.• That is, people are less likely to keep buying them
when price goes up, and much more likely to buy them when price goes down
What does elasticity look like on a graph?
Elastic
What does elasticity look like on a graph?
Inelastic
Practicing Elasticity
There is an equation for determining elasticity % change in QD over % change in $$
If the number is >1, the product is considered elastic
% QD% Price
Homework: Quiz tomorrow; Ch 4
review due
FrontPage: NNIGN
Bad Newspapers
There are 3 things you need to know about a product before you can know its “elasticity” First, whether there are readily
available (and roughly equivalent) substitutes
Second, whether the item takes a large portion of a person’s income
Third, whether the item is considered a necessity or a luxury
Readily available
/equal substitute?
Large portion of income?
Necessity or luxury?
Elastic or Inelastic demand?
Salt
Cars, in general
Toothpicks
Coffee
Tap water
Chevy Trucks
Gasoline, in the short term
“Heinz” ketchup
Gasoline, in the long term
Movies
Restaurant meals
iPad 3
Will it?
Demand for Pirates tickets: elastic or
inelastic?Price
Quantity Demanded
$75 10,000
$100 8000
$150 5000
$200 4000
$250 2000Another question: At which price is it best for
the Penguins to sell their tickets?
Inelastic
What is the best price for the Pirates?
PriceQuantity
Demanded
$75 10,000
$100 8000
$150 5000
$200 4000
$250 2000
Revenue
$750,000
$800,000
$750,000
$800,000
$500,000
When revenue increases after lowering of price, demand is ELASTIC
When revenue decreases after lowering of price, demand is INELASTIC
The Elasticity of Pizza