1 / 13

Elasticity of Demand, price ceilings, price floors

Elasticity of Demand, price ceilings, price floors. Mr. Odren. Price Elasticity of Demand. Refers to price responsiveness The measure of the price elasticity of demand is how much consumers respond to a given change in price . Economists measure the reaction of consumers to changes in prices

benjy
Download Presentation

Elasticity of Demand, price ceilings, price floors

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Elasticity of Demand, price ceilings, price floors Mr. Odren

  2. Price Elasticity of Demand • Refers to price responsiveness • The measure of the price elasticity of demand is how much consumers respond to a given change in price. • Economists measure the reaction of consumers to changes in prices • This measurement is called….PRICE ELASTICITY OF DEMAND!!!!

  3. Inelastic Demand • Demand is not affected by changes in price. • The good/service is a MAJOR necessity. • There are no satisfactory substitutes for the specific good/service. • Ex: Gasoline for automobiles. • Regardless of the price, people still demand the same amount of gasoline every week. • Ex: Insulin to a diabetic. If they don’t buy it they may die. Will pay the price of Insulin • Mathematically, inelastic goods and services have a price elasticity of demand that is less than 1.

  4. Graphing Inelastic Demand • This is what an inelastic good/service looks like when graphed…..

  5. Values of Inelastic goods/services • In order for a good to be considered inelastic, it must have a “value” of < 1….. • Here are some examples of inelastic goods… • Salt – 0.1 • Matches – 0.1 • Toothpicks – 0.1 • Gasoline – 0.2 • Coffee – 0.25 • Tobacco products – 0.45 • Automotive transportation – 0.2 • Insulin – 0.1

  6. Elastic Demand • A rise or fall in the price of a product GREATLY affects the amount which people are willing to buy. • Goods that do have sufficient substitutes are considered “elastic”. • The good and/or service is not a major necessity. • This means that if the price of an elastic good increases too much, then consumers will purchase a substitute good and be just as satisfied… • Example of an Elastic Good • Meals at a restaurant • $15.99 Chicken Alfredo at Olive Garden • Substitute for a cheaper meal • Cook at home • Mathematically, elastic goods and services have a price elasticity of demand, greater than 1.

  7. Graphing Elastic Demand • This is what an “elastic” good looks like when graphed….

  8. Values of Elastic goods/services • In order for a good/service to be considered “elastic”, it must have a value > 1….some examples…. • Private education – 1.1 • Meals at a restaurant – 2.3 • Ford cars – 4.0 • Fresh Tomatoes – 4.6

  9. What determines price elasticity of demand? • 1. Existence and similarity of substitutes • More substitutes, more responsive consumers will be to a change in price. • Ex: Diet Coke/Diet Pepsi • 2. Percentage of a person’s total budget devoted to the purchases of that good • If you do not spend much of your total budget on a particular good, you will probably not often notice increases in the price of that good. • 3. Time allowed for the consumer to adjust to the price change. • Takes a longer time to adjust to a new price • Longer time needed…greater price elasticity of demand

  10. Can the government place limits on pricing? • Yes!!! Price Floor and Price Ceiling • If the government wants to establish a minimum price for a good/service, it is called a price floor. • If the government wants to establish a maximum price for a good/service, it is called a price ceiling. • Remember, U.S. not a pure Market economy, but Mixed (Free Market AND Gov’t)

  11. COMPARISON • PRICE FLOORS • Always ABOVE equilibrium & cause Surplus!! • Benefits Producers • Consumers lose – have to pay higher prices • Ex. Agriculture crop prices, Min. Wage law • PRICE CEILINGS • Always BELOW equilibrium & cause Shortage!! • What does this mean? • Keeps demand high • Benefits consumers • Producers lose money • Ex. Rent controls for apartments, at times gas prices

  12. Graphical view PRICE CEILING PRICE FLOOR

  13. Video Clip • Video clip on impact of rent control. • Is it really the most effective way to help people afford housing? • Does it have unintended consequences?

More Related