1 / 29

Elasticity

Elasticity. of. Demand. Microecon – Unit 2 Part 3. You have a group of average consumers. Let’s say they all have a favorite gum…. which normally costs 50 ¢. Would most of these consumers still buy the gum if the price rose to 75 ¢?. Same group of consumers.

navid
Download Presentation

Elasticity

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 Microecon – Unit 2 Part 3

  2. You have a group of average consumers. Let’s say they all have a favorite gum… which normally costs 50¢. Would most of these consumers still buy the gum if the price rose to 75¢?

  3. Same group of consumers. Some years they go on their favorite vacation with their wives… ...which normally costs $1,000. Would most of these consumers still go if the price rose to $1500?

  4. 50¢ to 75¢ What’s the percentage change in the price for the gum? $1,000 to $1,500 What’s the percentage change in the price for the vacation?

  5. Economists examine this idea…. How will the demand for an item/service change when the price is changed? If the price goes up… will consumers buy the same amount? will consumers buy less or none at all?

  6. This is called…. Elasticity Elasticity is the responsiveness of one variable to changes in another variable, ceteris parabis (other things equal). Elasticity examines….will the quantity consumed change if the price goes up…or if the price goes down? If the price goes up…

  7. If the quantity demanded does not change we call the demand inelastic. If the quantity demanded changes we call the demand elastic. P INELASTIC P ELASTIC $300 $3 $200 $2 $100 $1 D D 10 m 100 200 500 Q Q

  8. There are characteristics of goods/services that can make their demand tend to be more elastic or more inelastic. Use your intuition to decide if each makes the demand more elastic or inelastic. Copy this chart into your notes.

  9. Elastic Inelastic 1. 2. 3. 4. 5. 6.

  10. Elastic Inelastic few substitutes many substitutes Will a change in the price of Dasani bottled water make a difference in the quantity demanded?

  11. Elastic Inelastic 1. many substitutes few substitutes 2. 3. 4. 5. 6.

  12. Elastic Inelastic necessity luxury Will a change in the price of insulin make a difference in the quantity demanded?

  13. Elastic Inelastic 1. many substitutes few substitutes luxury necessity 2. 3. 4. 5. 6.

  14. Elastic Inelastic inexpensive expensive Will a change in the price of pens make a difference in the quantity demanded?

  15. Elastic Inelastic 1. many substitutes few substitutes luxury necessity 2. inexpensive expensive 3. 4. 5. 6.

  16. Elastic Inelastic habit-forming non-habit forming Will a change in the price of coffee make a difference in the quantity demanded?

  17. Elastic Inelastic 1. many substitutes few substitutes luxury necessity 2. inexpensive expensive 3. non-habit forming habit-forming 4. 5. 6.

  18. Elastic Inelastic shorter time period longer time period Let’s say your refrig broke…would a change in the price of refrigs make a difference in the quantity demanded?

  19. Elastic Inelastic 1. many substitutes few substitutes luxury necessity 2. inexpensive expensive 3. non-habit forming habit-forming 4. longer time period shorter time period 5. 6.

  20. In addition to characteristics of products that tend to make demand for them be more elastic or inelastic… There is also the Total Revenue Test which will tell you if demand is elastic or inelastic. Total Revenue = price x quantity

  21. Let’s say there’s only one nail salon… in town where you could adorn your nails with this lovely design… ..or the very popular French nail manicure…

  22. Let’s say the nail salon changed the price of its manicures and found the following: price quantity $10 15 5 $15 1 $30 To apply the total revenue test, we see what happened to TR when P .

  23. So what is total revenue? Total Revenue= price x quantity $10 15 $150 $75 $15 5 $30 $30 1 With manicures, when the price went up the TR went down. So was the demand for manicures elastic (responsive) or inelastic?

  24. Elastic Inelastic 1. many substitutes few substitutes luxury necessity 2. inexpensive expensive 3. non-habit forming habit-forming 4. longer time period shorter time period 5. Total revenue test Total revenue test 6. P , TR  P , TR  P , TR  P , TR 

  25. Give 2 or 3 reasons to explain why demand for these products / services is more elastic or inelastic.

  26. enchiladas & coffee $15.00 P S $12.50 $10.00 $7.50 $5.00 $2.50 D enchiladas D coffee 10 20 30 40 50 Q So why does it matter if demand is more elastic or more inelastic? Which demand is relatively more inelastic?

  27. enchiladas & coffee $15.00 P S1 S $12.50 $10.00 $7.50 $5.00 $2.50 D enchiladas D coffee 10 20 30 40 50 Q at P = $7.50 how many cups of coffee are demanded? how many enchiladas? Let’s say the gov’t imposed a tax on pound of coffee sold by mfg’s to stores & on every enchilada sold from distributors to restaurants. What shifts?

  28. enchiladas & coffee $15.00 P S1 S $12.50 $10.00 $7.50 $5.00 $2.50 D enchiladas D coffee 10 20 30 40 50 Q $10.00 20 Enchiladas P = ______ & Q = _______ Coffee P = ______ & Q = _______ $11.00 28

  29. enchiladas & coffee $15.00 P S1 S $12.50 Because the demand for coffee is more _________, coffee makers are able to pass more of the _____ on to consumers. $10.00 inelastic $7.50 tax $5.00 $2.50 D enchiladas D coffee 10 20 30 40 50 Q $10.00 20 Enchiladas P = ______ & Q = _______ Coffee P = ______ & Q = _______ $11.00 28

More Related