responding to price changes (elasticity of demand & supply)
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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. - PowerPoint PPT PresentationTRANSCRIPT
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 DemandWhen P in, demand decreases When P increases, D stays the
sameThere are substitutes Few substitutes for good or
servicesWant Need