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Elasticity

Elasticity. Make a list of 5 items you purchase each month. Next to each item, put its price and the quantity you purchase. Which items would you buy more of if the prices were lower? Which items would you buy less of if the prices were higher? For which items are there substitutes?

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Elasticity

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  1. Elasticity • Make a list of 5 items you purchase each month. • Next to each item, put its price and the quantity you purchase. • Which items would you buy more of if the prices were lower? • Which items would you buy less of if the prices were higher? • For which items are there substitutes? • Do any of your purchases have a complement?

  2. Elasticity Of Demand

  3. Elasticity of Demand The relationship between the percentage change in quantity demanded and the percentage change in price. • Elasticity = “Responsiveness” • How responsive is consumer demand to changes in price?

  4. 3 Types • Elastic Demand: Response to change in demand is greater than the change in price • Inelastic Demand: Response to change in demand is less than the change in price • Unit Elastic Demand: Response to change in demand is equal to change in price. (expressed in percentages)

  5. Elastic Demand % change in Qd > % change in P Example:Price goes up 10% Quantity Demanded goes down 20% % Δ Qd > % Δ P

  6. Inelastic Demand % change in Qd < % change in price Example: Prices goes up 10% Quantity demanded goes down 5% % Δ Qd < % Δ P

  7. Unit Elastic Demand % change in Qd = % change in P Example: Price goes up 10% Demand goes down 10% % Δ Qd = % Δ P

  8. Factors that Determine ElasticityGoods May Be More Elastic When: • Number of Substitutes • If there are many substitutes, demand may be more elastic • Luxuries v. Necessities • Demand for luxuries is more elastic than demand for necessities • % of Income Spent On the Good • Demand is more elastic for goods that cost a larger percentage of income • Time • Demand is more elastic as time passes

  9. So what? • Elasticity of Demand Affects TOTAL REVENUE ( SOMETHING BUSINESSES CARE VERY MUCH ABOUT)

  10. Read p. 80-84. • Copy the chart from page 84. “Relationship of Elasticity of Demand to Total Revenue” • Complete Ch3 Demand H/O

  11. In your groups discuss the following and prepare to report the group consensus: • Our national government has decided to commit to a campaign to reduce smoking. To achieve this goal, a proposed tax of $3.00 will be added to each pack of cigarettes. • Do you think cigarettes are elastic, inelastic or unit elastic? • Based on your decision in #1, will a $3.00 tax reduce the number of smokers in our society by more than the price increase? • Would you support or oppose this proposal? Do you have other alternatives?

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