[ 3.3 ] Elasticity of Demand

[ 3.3 ] Elasticity of Demand

What is Elasticity? • Tells us how different variables in the economy respond to each other • If one thing happens, how will it affect something else? • Elasticity of Demand: how much will a change in price affect the quantity demanded?

Elasticity Defined Economists use the steps shown here to calculate elasticity of demand. Generate Explanations Why do you think observers may want to be able to measure elasticity precisely?

Elasticity Defined • Price Range- elasticity can vary depending on the unit price change • Ex. .50 to 1.50 or 4 to 7 for a magazine • Elasticity Values- • Less than 1- inelastic • exactly equal to 1- unitary elastic • More than 1- elastic • Interactive Graph: Understanding Elastic and Inelastic Demand (Pearson Ch 3.3)

Elasticity Defined Gasoline is a good many people continue to buy even when the price rises. Analyze Political Cartoons What does this cartoon suggest about the challenge consumers face when gas prices rise?

Factors Affecting Elasticity • Availability of Substitutes- yes elastic, no inelastic • Relative Importance- no elastic, yes inelastic • Necessities Versus Luxuries- luxury elastic, necessities inelastic • Change Over Time- sticky prices (short run) v. flexible prices (long run)

Factors Affecting Elasticity Elasticity of demand varies from situation to situation. Analyze Charts Why do you think demand is inelastic for the two items on the left side of the continuum?

Factors Affecting Elasticity For a football fan, there is no substitute for tickets to your favorite team’s game. Draw Conclusions Would you expect a Dallas Cowboys fan to pay more or less to watch two other teams?

Factors Affecting Elasticity When home prices fell when recession hit in 2007, demand did not rise immediately. Generate Explanations Why might demand for housing stay flat at first even when prices fall sharply?

How Elasticity Affects Revenue Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. Elasticity is also an important tool for business planners, like the pizzeria owner described earlier in this topic. The elasticity of demand determines how a change in prices will affect a firm’s total revenue, or income.

How Elasticity Affects Revenue This art gallery needs to sell only a small number of its high-priced artworks to generate significant total revenue.

How Elasticity Affects Revenue Achieving higher revenue means finding the best combination of price and quantity demanded. Analyze Charts Why does revenue for this restaurant fall when price increases from $4 to $5?

What determines Demand Elasticity? • Can the purchase be delayed? • Yes  elastic (new DVD) • No  Inelastic (medication) • Are adequate substitutes available? • Yes  Elastic (generic vs. brand name meds) • No  Inelastic • Require much income? • Yes  Elastic (might need time to save) • No  Inelastic

How Elasticity Affects Revenue The relationship between price change and revenue differs depending on elasticity of demand. Analyze Charts In which two situations will revenue likely fall in response to a price change?

Quiz: Elasticity Defined Describe your demand for a product if you buy the same amount of it or just a small amount less after a large price increase. A. elastic B. unitary elastic C. inelastic D. hyperelastic

Quiz: Factors Affecting Elasticity Which of the following is an example of inelastic demand? A. Jason wants the most expensive cellphone. He decides to get a cheaper model. B. Priya wants to go to the season-opening game. Tickets to another game cost less, but she still buys tickets for the opener. C. Tianna wants to try out a new, expensive restaurant. She goes to another restaurant whose food is excellent and costs less. D. Shawn wants to buy a house in one neighborhood. But after searching, he decides to buy a house elsewhere instead.

Quiz: How Elasticity Affects Revenue How does elasticity affect potential revenue for a firm? A. If demand for a good is inelastic, lowering the price could raise revenue. B. If demand for a good is inelastic, raising the price could reduce revenue. C. If demand for a good is elastic, raising the price must increase revenue. D. If demand for a good is elastic, raising the price could reduce revenue.

[ 3.4 ] Fundamentals of Supply

The Effect of Price on Supply Suppose you were running a business. What would you do if you discovered that customers were still willing to buy your product if you raised the price 20 percent? Would you take an extra day off and only work four days each week? After all, you would still earn the same income with 20 percent less work. Or would you respond like most entrepreneurs would by producing more and increasing your revenue?

What is Supply? • The amount of a product offered for sale at all possible market prices • Law of Supply: • Suppliers normally offer more for sale at higher prices and less for sale at lower prices • Production and number of suppliers • Why? • If prices go up, supply goes _______ and vice versa.

The Effect of Price on Supply The price of a good determines how much of that good a supplier will provide. Contrast How is the law of supply different from the law of demand?

The Effect of Price on Supply This warehouse holds goods that help meet consumer demand. Make Predictions Consumers’ demand is sensitive to price levels. How do you expect price to affect supply? Explain your answer.

Understanding Supply Schedules This schedule shows how many slices one pizzeria owner will supply at different prices. Analyze Charts What would you expect from this pizzeria if prices rose to $7 a slice?

Understanding Supply Schedules This schedule shows how many slices all pizzerias in a market will supply at different prices. Analyze Charts What would you expect to happen in this market if prices dropped to $.50 a slice?

Individual Supply Curve • The Supply Curve for Beach Balls:

Market Supply Curve

Change in… • Quantity Supplied • Change in the amount that producers bring to market at any given price • How does it look on supply curve? • Supply • Suppliers offer different amounts of products for sale at all possible prices in the market. • How does it look on supply curve?

Elasticity of Supply • Elasticity of Supply Over a Short Time: • Agriculture inelastic in the short run • Services elastic on the short run • Elasticity of Supply Over a Longer Time: • Agriculture is elastic in the long run

Elasticity of Supply Apply Concepts Suppose the price for a good changed by 100 percent and in response the quantity supplied changed by 50 percent. Explain whether supply is elastic or inelastic in this case.

Elasticity of Supply Cranberry vines take three or four years to produce fruit, meaning that product has inelastic supply in the short term.

Quiz: The Effect of Price on Supply Which factor causes firms to increase production when the price of a good or service goes up? A. desire for profits B. increase in demand C. need to unload inventory D. reduction in costs

Quiz: Understanding Supply Schedules Which variables does a supply schedule show? A. quantity demanded and price B. quantity demanded and quantity supplied C. quantity supplied and price D. quantity supplied by individual firms and the market

Quiz: Elasticity of Supply Which of the following explains why firms differ in elasticity of supply in the short term? A. quality of decision-making B. ease of changing quantity supplied quickly C. inability to understand the law of supply D. changes in market demand

[ 3.3 ] Elasticity of Demand