Elasticity

1. Elasticity Elasticity shows how sensitive Quantityis to Change in Price.

2. THE LAW OF DEMAND SAYS... Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? DOES IT MATTER?

3. 4 Types of Elasticity • Elasticity of Demand • Elasticity of Supply • Cross-Price Elasticity (Substitute or Complement) • Income Elasticity (Normal or Inferior)

4. 1. Elasticity of Demand Inelastic Elastic %Δ Q Ex. Ex. %Δ P Price Price 20% 5% 35% Quantity Quantity

5. Elastic or Inelastic Explain why for each of the following. • Salt • New Cars • Pork Chops • European Vacation trip • Insulin • Insulin at one of four drugstores in a shopping mall.

6. 1. Elasticity of Demand Elastic Inelastic

7. 1. Elasticity of Demand Elastic Inelastic

8. 1. Elasticity of Demand Inelastic Elastic %Δ Q %Δ P Price 20% 20% Unit Elastic Inelastic 1 Elastic Quantity

9. 1. Elasticity of Demand Total Revenue Test TR = P x Q Inelastic Elastic Price

10. Is the range between A and B, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 5 x 225 = $1125 % Δ Q % Δ P Price decreased and TR increased, so… Demand is ELASTIC Price A 10 5 B 100 225 Quantity

11. Is the range between B and A, elastic, inelastic, or unit elastic? Total Revenue 10 x 100 = $1000 Total Revenue 8 x 110 = $880 % Δ Q % Δ P Price Price increased and TR increased, so… Demand is INELASTIC A 10 8 B 100 110 Quantity

12. 2. Elasticity of Supply Inelastic Elastic %Δ Q Ex. Ex. %Δ P Price Price 20% 5% 35% Quantity Quantity

13. 2. Elasticity of Supply Inelastic Elastic %Δ Q %Δ P Price 20% 20% Unit Elastic Inelastic 1 Elastic Quantity

14. Elasticity Coefficient for Demand & Supply | Δ Q | (Q1+Q2)/2 = % Δ Q | Δ P| % Δ P (P1+P2)/2 15 5 Price QBig-Qsmall (QBig+Qsmall)/2 A B PBig-Psmall 100 220 (PBig+Psmall)/2 Quantity

15. Elasticity Coefficient for Demand & Supply QBig-Qsmall (QBig+Qsmall)/2 = % Δ Q PBig-Psmall % Δ P (PBig+Psmall)/2 15 5 Price A 220-100 120 (100+220)/2 B 160 100 220 = 15-5 10 (15+5)/2 10 Quantity

16. 3. Cross-Price Elasticity Complement Substitute %Δ Q B %Δ P A

17. 3. Cross-Price Elasticity Complement Substitute %Δ Q B %Δ P A 0 Complement Substitute

18. 4. Income Elasticity Inferior Normal %Δ Q %Δ I

19. 4. Income Elasticity Inferior Normal %Δ Q %Δ I 0 Inferior Normal

20. Elasticity Practice

21. Elasticity • The demand for video game tokens at the neighborhood arcade. Using the midpoints formula, between $.50 and $.25 the price elasticity of demand equals______? • Suppose that Price = .75 currently. A decrease in price will do what to total revenue?

22. Demand for prime rib. Using the midpoints formula, this demand curve is unit elastic between _______? • This demand curve is price elastic from _______ to _______. • Suppose that Price = $6.00, A 3% decrease in quantity demanded would require a ____ increase in price. • Suppose that Price = $6.50 currently. A decrease in price will do what to total revenue.

23. AP Micro Free Response Elasticity FRQ-Assume the following about laptop and desktop computers: • The demand for computers is price inelastic • Laptop and desktop computers have a cross price elasticity coefficient of +3.6 • Computers and DVD burners have a cross price elasticity coefficient of -0.8 • All computers have a income elasticity coefficient of +2.3 (a) Using correctly labeled graphs, show the impact of a change in technology that improves only the production of laptop computers on the following: i. Price of laptop computers ii. Output of laptop computers iii. Total revenue of laptop computer producers iv. Price of desktop computers v. Output of desktop computers (b) Using new correctly labeled graph, show the impact of a decrease in price of DVD burners on the following: i. Price of computers ii. Output of computers (c) Using new correctly labeled graphs, show the impact on the following when income increases by 30%: i. Price of computers ii. Quantity of computers iii. Price of DVD burners iv. Quantity of DVD burners