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Elasticity of Demand

“We have this P owerpoint because I am easily confused.” -- Coach D. Elasticity of Demand. Elasticity. Demand is ELASTIC if the QD changes by a relatively large amount due to a change in price.

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Elasticity of Demand

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  1. “We have this Powerpoint because I am easily confused.” -- Coach D Elasticity of Demand

  2. Elasticity • Demand is ELASTIC if the QD changes by a relatively large amount due to a change in price. • The STRETCH comes from consumers NOT following a product as its price increases or decreases. The 2 numbers get farther apart. • This is when consumers start thinking about substituting a similar product. • Horizontal (flat) graph.

  3. Inelasticity • This is when QD is not affected, to great degree, by a change in price. • Consumers continue to buy a product even when the price increases/decreases. • The demand stays close, after a price change, to what it was before the change. • Inelastic demand requires a much larger price change to show a disruption in demand. • Vertical (steep) graph.

  4. Necessities vs. Luxuries • Goods that people can’t live without have INELASTIC demand. • Demand is tied to the product, no matter what the price. • Ex: Medications, the first few units of Food, Water, and Shelter. Others??

  5. Necessities vs. Luxuries • Goods that people can do without are called “Luxuries” and have ELASTIC demand. • These goods can be given up, so when prices rise demand changes by a significant percentage. • If the price to travel to Florida is too high, people will stay home. • Ex: Newest electronic devices, vacations, a second car, and lake house. Others??

  6. Availability of Substitutes • The more substitutes that are available the more ELASTIC demand will be for a specific product. • Oranges are a close substitute for tangerines. It the price for tangerines rises, consumers can easily substitute oranges. • Some products have Perfect Substitutes (carpet pads). • No substitute means either pay more or go without. (Inelastic= shoes, computers, light bulbs)

  7. % Income Spent on the Good • Demand for goods that are inexpensive or purchased infrequently is inelastic (not very noticeable or expensive). • Goods that are purchased frequently (cereal, cheese, shampoo) or goods that are more expensive (appliances, autos, houses) have a more elastic demand, because a price increase is more noticeable (small %= much more $)

  8. Who Pays the Bill • Elasticity is smaller (more Inelastic) when someone else is paying. It doesn’t matter to you (Dinner with parents). • You have no response to the price of a product if you aren’t the one paying. • If you have insurance for Dr. visits, then, if the cost of a visit goes up, it won’t make you go less often because you don’t pay more.

  9. Elastic or Inelastic • Good is a necessity: open heart surgery • Good is a luxury: Cashmere sweater • Few close substitutes: Drinking water • Many close subs: Dasani brand water • Small cost/ % income: Bubble gum • Larger cost/ % income: Yacht (Big Boat) • Someone else pays: health insurance • You pay: backpack

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