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Responding to Price Changes (Elasticity of Demand & Supply)

Responding to Price Changes (Elasticity of Demand & Supply). Lesson 2.5. The Law of Demand. The quantity demanded varies inversely with price, other things constant (a.k.a. Price Effect) Price = Quantity demanded Price = Quantity demanded. Elasticity of Demand.

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Responding to Price Changes (Elasticity of Demand & Supply)

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  1. Responding to Price Changes (Elasticity of Demand & Supply) Lesson 2.5

  2. The Law of Demand • The quantity demanded varies inversely with price, other things constant (a.k.a. Price Effect) Price = Quantity demanded Price = Quantity demanded

  3. Elasticity of Demand • Law of Demand does not specify the degree to which the quantity demanded will change. • Degree of Change = QD vs. Price Changes • Demand is elastic if QD changes significantly as price changes. • Demand is inelastic if QD changes little as price changes.

  4. Red Bull • If price of Red Bull increased from $2.00 to $2.50, would you still purchase from the vending machine? • At what price would you change your behavior? • This is price elasticity – how producers and consumers react to a change in price.

  5. Elastic vs. Inelastic • Rubber Band – doesn’t take much effort to change its shape. This means you are RESPONSIVE to price changes (elasticity). • Pencil – takes much more effort to break the pencil than to change the shape of a rubber band. This means you are not RESPONSIVE to price changes (inelastic).

  6. Estimating Elasticity • Salt – no substitutes, small portion of income, and a necessity. All of these say that SALT is considered INELASTIC. • Sports Car – substitutes available, large portion of your income, and a luxury item. All of these say that a SPORTS CAR is considered ELASTIC.

  7. Handouts • Elasticity Scenarios • Will quantity demanded be elastic or inelastic? Which factors play a role? • Justify your decisions with sound economic reasoning.

  8. Demand Curves • Why do the curves look different? • Talk to those around you and determine why they look different? • Price elasticity can be zero if someone won’t buy a product. • Reasons: cultural, health, environmental, political, moral, etc.

  9. Inelastic Demand • Price change has little or no effect on QD. • Line will be steep!

  10. Elastic Demand • Price change has a huge change on QD. • Line will be more gradual!

  11. Total Revenue Test • Elasticity of Demand • I will help you with the first one.

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