responding to price changes (elasticity of demand & supply) lesson 2.5
TRANSCRIPT
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
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
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
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
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
Elasticity Scenarios Will quantity demanded be elastic or
inelastic? Which factors play a role? Justify your decisions with sound
economic reasoning.
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
Price change has little or no effect on QD.
Line will be steep!
Elastic Demand
Price change has a huge change on QD.
Line will be more gradual!
Total Revenue Test
Elasticity of Demand I will help you with the first one.
Elastic Demand Inelastic Demand
When P in, demand decreases When P increases, D stays the same
There are substitutes Few substitutes for good or services
Want Need