mr. schoonover 10/02/2009. elasticity of demand – a measure of how people change their buying...
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Elasticity of DemandMr. Schoonover
10/02/2009
Elasticity of Demand – A measure of how people change their buying patterns when their income increases
Elasticity of Demand
Inelastic – A good that is not very responsive to price changes◦ A price increase does not have a significant
impact on how much you would buy◦ You will always find the money to buy it
Elastic Good – A good which is very responsive to changes in price◦ A price increase has a significant impact on how
much you would buy.◦ If price increases even a little – you buy much less
Types of Elasticity
Formula for Calculating Elasticity=% change in quantity demanded
% change in price If a calculation is…
◦ ≥ 1 then the demand is INELASTIC◦ = 1 then the demand is UNITARY◦ ≤ 1 then the demand is ELASTIC
Values of Elasticity
Price change - $4-$3 = 25% Change in QD – 10-20 = 100% 100%/25% = 4
Price change - $6-$2 = 67% Change in QD – 10-15 = 50% 50%/67% = .75
Calculation for Elasticity
Availability of Substitutes – if there is no other options, our demand is inelastic.
Example: Flight of the Conchords Tickets Example: Playoff Tickets
◦ If there are lots of substitutes, demand is elastic. Example: hand sanitizer Example: pencils
Factors that determine Elasticity
Relative Importance – how much of your budget you spend on an item.◦ If you spend a lot of money on one thing, you
notice it more Example: Gas
◦ If you rarely buy something, you would hardly notice an increase in price. Example: Shaving cream
Factors that determine Elasticity
Necessities vs. Luxuries – Varies – people NEED necessities, they would like Luxuries.◦ Necessity- inelastic◦ Luxury - elastic
Factors that determine Elasticity
Change over Time – It requires some amount of time to find a substitute for a good.◦ Short term – inelastic◦ Long term - elastic◦ Example: Purchasing a car – you may buy a F-150
because gas prices are low. If price raises, you have to have some time to look for a car with better gas mileage
Factors that determine Elasticity
Pull out your sheet!
What will you sell?
Total Revenue – Price x Quantity
Total Revenue
Price
Quantity
$1 10
$2 8
$3 8
$4 7
$5 6
Total Revenue
$10
$16
$24
$28
$30