Economics Mr. Kirby CHS Unit 2: Lesson #3 Elasticity of Demand!

1. Economics Mr. Kirby CHS Unit 2: Lesson #3 Elasticity of Demand!

2. Warning Concentration on these slides is guarantied to improve your economics grade.

3. We will be using Cornell Note Taking Format Today! Smile and “Own the Day! Take one step at a time to Success in Economics class!

4. Unit Two: Learning Objectives: North Clackamas School District Social Studies Priority Standards: • HS.51 (A):Explain how supply and demand represents economic activity and describe the factors that cause them to shift.

5. Lesson Three: Daily Learning Target I Can define and explain in writing the following key Economic concepts: • Diminishing Marginal Utility • Elasticity • Elastic Demand • Inelastic Demand • Factors Affecting Elasticity of Demand

6. “I’ll buy at 5 cents but not at 10 cents If they are made from real lemons.” 10¢ “Not much business so I’m going to lower my price to 5 cents. D 10¢ 5¢ QD2 QD1 “Movement, just movement, no shift” “Change in QD” “Price change” “Point to point” “Movement” Demand does not refer to a numerical amount but to a behavior. Our“willingness to buy at various prices.” QD is a numerical amount based on a“particular price.” QD is a value on the X axis and represented by a “movement” caused by a“price change”. Lower the price & increase QD

7. Demand – willing & able to buy “Change in QD” [price change, point to point movement] Demand – quantities of products that consumers are willing and able to buy at various prices during a giventime period. Would Prince be willing & able to buy at P1? Let’s ask him! Because I’m willing – WILLING, and I’m able –ABLEat P1. D P1 P2 P3 QD1 QD3 QD2 And, what about Doris Day – is she “willing able” at P2?. Let’s ask her! And Sarah Palin “willing & able” at P3? You have to be “willing and able” to buy to be placed on the demand curve.

8. D Demand – willing and able to buy P1 [“Demand” is the whole curve] [all prices] We have demand for something because we expect it to be useful to us in satisfying our wants Demand is constantly changing because of price and non-price factors such as [“TIMER”]. Taste Income Market size Expectations (future income, future price, & future availability) Related good price changes for substitutes & complements P2 QD1 QD2 “Change in Demand” (curve) iPhone D2 D1 Demand is a “line” and not a point. It is a “schedule” of the amounts consumers are “willing and able” to buy. D3 QD1 QD3 QD2

9. Goods That Have Less Demand Than Years Ago • M. Jackson glove • Power Rangers • Parachute pants • Old Jellies • Dalmatian puppies • Furbys • Pogs • Typewriters • RAZR cell phones • CDs 40 million were sold RAZR M. Jackson’s popularity

10. Name Goods That Have Greater Demand Today 1. New iPad 2. Microsoft Surface 3. Wii 4. LCD monitors 5. Photo messages 6. Nintendo DS 7. PS4 9. XBOX 360 10. Flat Screen TVs 11. PSPs 12. Seven jeans 13. Spiked hair 15. iPhone 6 16. Samsung 5S 17. Bratz Dolls 18. Kindle Fire HDX iPad Hoodies PlayStation 3 Bratz Dolls Wii XBOX 360

11. D Three Reasons Why the Law of Demand Exists P1 P2 QD1 QD1 • Income Effect • When things are expensive, money buys less • When things are cheap, money buys more • Substitution Effect • When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears • Diminishing Marginal Utility • Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower. • Ex. When I’m hungry, I typically will buy2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco

12. Law of Diminishing Marginal Utility [DMU] With each additional pair, he will get less utility and therefore pay less. I think I would rather spend my money on an iPad Mini! I would love a pair of shoes! Not so much! Wow!

13. Women And Their Shoes Wal-Mart sells 20,000 pairs of shoes each hour. Women buy 19,000 of the 20,000 pairs of shoes. Americanwomen spend $15 billion each year on shoes. American women spend $5 billion on foot problems. An exception on this would be for women. They get just as much utility [if not more] out of the 50th pairof shoes as for the 1st pair. Of course the new pair are a different color.

14. Let’s take a look at some examples of “Diminishing Marginal Utility” I’m stuffed. I don’t want any more! [Disutility has set in!] “much utility” Utility [satisfaction] “not so much” # of cookies consumed

15. Disutility [or negative utility]? . I ate one hamburger, and it tasted great. The next two tasted okay. I wish I hadn’t have eaten the 5th. I can’t finish the 6th. About this time there is toilet trauma. Or, “inconvenienced afterward”. DIMINISHING MARGINAL UTILITY Utility(satisfaction)decreases as more of the same product is consumed.

16. 5 Days Without Liquid

17. Too Much Relief? I’ll pay you $1 to drink another glass. Law of DMU As an individual consumes more of a good, eventually MU will decrease.

18. Diminishing Marginal Utility In High School Romance When the girl says, “We need to talk”, or the guy sends a “text message” to end it, “disutility” has occurred. “I know what love is.” “I can’t get no satisfaction [utility] any more.” Remember, “Man Law #1” (affectionately referred to as the “weasel clause”)says:. Text, Skype, Tweet or Photo Message her! “It’s been fun, but I think I’m entering the diminished marginal utility [satisfaction] phase of our relationship.”

19. The “Weasel Clause”: Not In Person A “man law” says, Do not break up with a woman in person. She will cry and talk you out of it. Text, Skype, Tweet or Photo Message her!

20. Whatever You Do, Do Not Break Up In Person Of course, you might get this! Maybe she should tweet also because she might get this!

21. Exactly what do you tweet if you want to break up? “Welcome to Dumpsville”Population –“U” Here it is!!! Why does attraction towards one’s wife reduce as years of married life increase? “Diminishing Marginal Utility!!!

22. There are exceptions to “Diminishing Marginal Utility”. For instance, if you are…. . The “World Champion Hot Dog Eater”: 69 Hot Dogs in 10 minutes

23. Hot Dog Winner 7 Years In A Row Joey “Jaws” Chestnut and 69 hot dogs Sonya Thomas – 40 dogs [won pink Pepto Bismol belt] Joey Chestnut, at 215pounds before the contest (and 235 afterwards) won the “Nathan’s Famous Hot Dog” contest with 69 hot dogs in 10 minutes. This contest has been held every year on July 4 since 1916. Typically, a single Nathan’s hot dog is very filling and 4 of them are an “invitation to disaster.” At 320 calories per dog, he put 22,080 calories into his stomachin ten minutes, thus the 20 extra pounds.

24. His Reward Joey ate 103 Crystal Hamburgers and won $10,000. Symbolic of gastronomic greatness Joey ate the equivalent of 1 dog every 8.6 seconds. For his victory, he received the coveted “mustard-yellow champion’s belt” and aone year’ssupply of hotdogs from Nathan’s. The man he defeated earned $150,000in one year for similar contests, including $25,000for a winning appearance at the “Glutton Bowl”, in which he consumed 18 pounds of cow’s brains.

25. Sonya Thomas [“The Black Widow”] at 98 pounds sets the Female Record at 40 Other eating accomplishments of Sonya at competitive eating contests are these: 5.75lbs. deep fried asparagus in 9 minutes. 11 pounds of cheesecake in 9 minutes 167ChickenWings in 32 minutes 65 hard boiled eggs in 6 minutes, 40 sec. 5 pounds of fruitcake in 10 minutes 7 (¾ pound) hamburgers in 10 minutes 9 pounds crawfish jambalaya in 10 minutes 36 dozen Acme Oysters in 10 minutes 23 pulled pork sandwiches in 10 minutes 7 (3/4 pound) turkeys - 12 minutes 43 soft tacos - 11 minutes 89 meatballs - 12 minutes 44 lobsters – 12 minutes And 38 Moon Pies – 8 minutes

26. Gas prices keep rising but we keep buying!

27. Doesn’t the law of demand state that consumers buy less at higher prices? So, why are we still buying gas?

28. Elasticity of Demand • Elasticity of demand is a measure of how consumers react to a change in price. • Inelastic demand is demand that is not very sensitive to a change in price. • Elastic demand is demand that is very sensitive to a change in price.

29. Think pants. These pants have inelastic waistbands. The waistbands do not change if people gain weight.

30. Our demand for gasoline is inelastic. It does not change even with a price increase.

31. Think pants again! Sweat pants have elastic waistbands. The pants change depending on the size of the person.

32. Our demand for apple juice is elastic. If the price increases, we will buy less. Our demand changes.

33. So, why is our demand for apple juice elastic and our demand for gasoline inelastic?

34. Factors Affecting Elasticity of Demand • The following are factors that can affect the elasticity of demand: • Availability of Substitutes • Relative Importance • Necessities Versus Luxuries • Time (It takes time to find substitutes.)

35. It’s obvious, isn’t it? We can substitute orange juice for apple juice. Therefore, we deal with a price increase by substituting one product for another product.

36. However, we cannot substitute milk for gasoline.

37. What is this graph telling us about elasticity of demand?

38. Specific vs. General Market When we talk about Elasticity of Demand it is important to note if we are talking about the market in general or are we talking about a specific firm.

39. Total Receipts Test The total receipts test is the way we figure out whether demand is elastic, unit elastic, or inelastic.

40. Elastic or Inelastic(Total Receipts Test) $2 $1 Elastic Inelastic 20 30 40 50 Total Receipts Test 20 x $2 = $40 Total Receipts Test 20 x $2 = $40.00 50 x $1 = $50 30 x $1 = $30.00

41. Elasticity of D– the way price affects QD.Elastic - QDthat isvery responsive to price.Inelastic- achg in price has littleimpact on QD. • Elastic (flexible) Demand • Substitutes (butter) • Luxury(mink coat) • Expensive(car) • Has durability(refrigerator) • Lasts a long time (gas-guzzling car) • Inelastic (inflexible) Demand • No substitutes(milk) • Necessity(insulin) • Inexpensive(safety pin) • No durability(pencil) • Lasts only a short time(bread)

42. Memorex $2.50 Maxell $2.50 Sony $2.50 Kodak $2.50 . Sony “Total Receipts” Test $2.50x100,000=$250,000 $1.50x600,000=$900,000 +$650,000 Just $1.50 D -$1 All made $250,000 Elastic Demand For Blank DVDs

43. Inelastic Demand for Home Heating Oil Most houses are heated by natural gas or electricity. D Heating oil is mostly used in NE U.S. to fuel furnaces and boilers. -$1 Total Receipts Test $2 = $30 bil. $1 = $20 bil. -$10 bil. +25% QD -33% sales

44. ElasticityofSoft Drinks

45. Inelasticityof Milk

46. Estimating the Elasticity of Demand3 Key Questions:1. Subs? 2. Necessity? 3. Expensive?

47. ElasticorInelasticDemand Elastic or Inelastic Demand Elastic Inelastic

48. How to Determine Total Receipts (Total Revenue) • Price X Quantity • Elastic Demand has larger total receipts at lower prices • Inelastic Demand has larger total receipts at higher prices • Unit Elastic Demand has the same total receipts regardless of price

49. Total Receipts Illustrated • Elasticity for stuffed Kermit the Frog at Disney World