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Learning and Understand Elasticity of Demand

Learning and Understand Elasticity of Demand. A step by step guide to economic elasticity By Tom Gunnells. Begin. The Three Parts of Elasticity. There are three parts to understand when discussing Elasticity.

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Learning and Understand Elasticity of Demand

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  1. Learning and Understand Elasticity of Demand A step by step guide to economic elasticity By Tom Gunnells Begin

  2. The Three Parts of Elasticity • There are three parts to understand when discussing Elasticity. • Change in Quantity Demanded – What was the change in the demand of a given product? • Change in Price – What was the change in price of a given product? • What does a combination of the change of Price and a change in Demand tell us about an object? • These are all questions that we will answer!

  3. Think About Price • If the price of the following goods went up $5, would consumers still buy them? • House • Car • Candy Bar • Whole Pizza • 1 Bottle of Water • Can of Pop • Silly Band • This is Elasticity! Learn More!

  4. What would you like to learn about? Determining a Change in Price Determining a Change in Demand Determining Elasticity

  5. Change in Quantity • When a change in quantity is discussed, we are talking about the change in the quantity demanded of any good by a consumer. For this example, and all of the examples in the lesson, let’s use a bottle of Gatoradesold in Mr. Tokar’s class.

  6. Determining Change in Quantity • Let’s ignore the price when trying to figure change in quantity. Just focus on the number sold. • It’s easy to see that there’s been a reduction of 15 Gatorades, but we need to find the percent change. To do that, we’ll use the following formula New Quantity – Old Quantity (Old Quantity + New Quantity) /2 This can also be shown as | Q2-Q1 | _ (Q2+Q1)/2 ** What do the bars | | mean around the equation? Absolute value. We’ll always turn the number inside those bars to a positive when we’re done with the math inside of them.

  7. Determining Change in Quantity • Let’s put our numbers into the formula |Q2-Q1| _ |(Q2+Q1)/2| |45-60|(45+60)/2 15 (not -15) 52.5

  8. Determining Change in Quantity 15 (not -15) 52.5 15/52.5 = .2857…. =.29 This tells us that there was a .29 change in quantity demanded This can also be expressed as a 29% change, and may be represented by DQ , the Change in Quantity. Ready to try it on your own?

  9. Quiz – Determine Change in Quantity Remember the formula |Q2-Q1) (Q2+Q1)/2 -20 % -10 % 15% 20 % Back to Start

  10. Incorrect • Remember, the top line is always positive. That’s what the absolute value bars are for. Anything that comes out of |Q2-Q1| is always positive. • Let’s try it again. Retake Quiz

  11. Incorrect • Let’s try this again - • Remember, Q2=55, Q1=45 so, __55-45____ = 10 (Q2+Q1)/2 Retake Quiz

  12. Change in Price • When a change in price is discussed, we are talking about the change in the price of any good purchased by a consumer. For this example, and all of the examples in the lesson, let’s use a bottle of Gatoradesold in Mr. Tokar’s class.

  13. Determining Change in Price • Let’s ignore the quantity when trying to figure change price. • It’s easy to see that there’s been a raise in price, but we need to find the percent change. To do that, we’ll use the following formula New Price – Old Price (Old Price + New Price) /2 This can also be shown as | P2-P1 | _ (P2+P1)/2 ** What do the bars | | mean around the equation? Absolute value. We’ll always turn the number inside those bars to a positive when we’re done with the math inside of them.

  14. Determining Change in Price • Let’s put our numbers into the formula |P2-P1| _ (P2+P1)/2| |2-1|(2+1)/2 1__ 1.5 = .6666 or .67

  15. Determining Change in Price • So, what does .67 mean? • There was a 67% change in price • Are you ready to try it on your own? Price Quiz

  16. Quiz – Change in Price • Lets assume that lunch at school was originally sold for $1.50 • The new price for lunch is $3.00 • Find the % change in price using the following formula |P2-P1|__ (P2+P1)/2 50% 67% 100% 200% Back to Start

  17. Incorrect • Remember, plug in the values for the correct variable. • P2=$3.00 • P1=$1.50 • |P2-P1| should be |3-1.50| • (P2+P1)/2 should be (3+1.50)/2 • We are left with 1.50/2.25 Retake Quiz

  18. Determining Elasticity • To determine elasticity, you’ll need to know the skills that we learned in the first two sections. If you don’t remember how to determine change in price and change in demand, • In the last two lessons we learned how to determine: • Change in Quantity, or DQ • Change in Price, or DP • We will use both of these numbers to calculate elasticity Go Back

  19. Determining Elasticity • To determine elasticity, we divide DQ/DP • Since we already know how to figure out DQ/DP, lets use the following numbers • DQ= 20% • DP= 67% By dividing DQ/DP, we get our PED (price elasticity of demand) So, 20%/67% =.30 But what does this all mean?

  20. What does PED tell us • The Price Elasticity of Demand (DQ/DP) tells us how consumers will respond to a price change of a good. • Inelastic – The change in demand will be less than the change in price. PED<1 • Elastic – The change in demand will be more than the change in price. PED>1 • Unit Elastic – The change in demand and the change in price will be the exact same. PED=1 • In our previous example, the DQ/DP(PED) was .30 • This means that our good was INELASTIC!

  21. Inelasticity • Inelastic – The change in demand will be less than the change in price. • Example – Insulin - People who need insulin to help their body regulate sugar need it. It is not a choice. This is important medicine to them. The amount they demand will not change with price. • Inelasticity is when PED<1

  22. Elasticity • Elasticity – The change in demand will be more than the change in price. • Example – Orange Juice- No one needs Orange Juice. There are many substitutes available. If the price of OJ goes up to $20 a gallon, very, very few people will continue to buy OJ. Customers will buy other juices whose price remain low. • Elasticity is when PED>1

  23. Unit Elasticity • Unit Elasticity – The percent change in quantity will be equal to the percent change in price. • This is a good where the demand changes at the same rate of the price. It doesn’t have many substitutes, but it’s also not a necessity. Some examples of Unit Elastic goods are cars, and airplane tickets. • Elasticity is when PED = 1 Take the Quiz

  24. Quiz • A good has a PED of 8.31. Is this Elastic, Inelastic, or Unit Elastic? Elastic Inelastic Unit Elastic

  25. Incorrect – Let’s Review • Inelastic: PED<1 • Elastic: PED>1 • Unit Elastic: PED=1 Retake Quiz

  26. Congratulations! • You’ve passed! • You now know the secrets to understanding Elasticity! Back to Start

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