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3.3 Elasticity of Demand

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Greg Caskey

on 15 December 2017

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Transcript of 3.3 Elasticity of Demand

3.3 Elasticity of Demand
Changes in Price Elasticity of Demand
1. Substitutes
When substitutes are available for a good, DEMAND IS MORE ELASTIC (Ex: Cola, Pizza, Shoes)

2. Percentage of Budget
When a product is a large portion of HH budget, DEMAND IS MORE ELASTIC (Ex: Toothpicks vs. Cars)

3. Time
The longer you have to adjust to a price change, DEMAND IS MORE ELASTIC FOR A PRODUCT (Ex: Airline Tickets, Gasoline)
Price Elasticity of Demand
While all demand lines slope downward from left to right, their shape and steepness can be very different
Example:
A quart of milk and a liter of cola sell each for $1.00.
According to the Law of Demand, If the price of milk rises to $1.50, people will buy less milk. If the price of cola rises to $1.50, people will also buy less cola.
Although the rise in price is the same, which would have a larger decrease is sales?

What is the distinction between quantity demanded and "demand"?
This graph shows an increase in QUANTITY DEMANDED due to PRICE CHANGE
This only occurs due to price change.
This graph shows an increase in DEMAND.
Remember, Demand represents the ENTIRE LINE, as this takes into account different prices and quantities demanded.
So, when there is a change in Demand, the whole line shifts.
T.R.I.B.E.S
A measure of the impact of the Price Effect.
Price Effect= People buy less of something at higher prices than they would at lower prices.

When the Price Effect is LARGE, demand= ELASTIC
For cola, a small price change causes a large change in Q.D.
Q.D. is SENSITIVE to price change.

When the Price Effect is SMALL, demand= INELASTIC
For milk, a small price change causes only a small change in Q.D.
Q.D. is INSENSITIVE to price change.
Price Elasticity of Demand
Example: Milk vs. Cola
From $1.00 to $1.50...

Milk sales drop from 70 quarts to 60 quarts. Milk revenue rises from $70 (70 x $1.00) to $90 (60 x $1.50).

For Milk, DEMAND IS INELASTIC

Cola sales drop from 70 liters to 40 liters. Cola revenue falls from $70 (70 x $1.00) to $60 (40 x $1.50).
For Cola, DEMAND IS ELASTIC
1. 52 Inch Flatscreen _________________
2. Table Salt _________________
3. Tshirts with the logo of
a losing Super Bowl team
the day after the game ________________
4. Last minute airline tickets _________________
5. Cigarettes _________________
6. Restaurant meals _________________
7. Airline travel for vacation _________________
8. Insulin _________________
9. Toothpicks _________________

Elastic or Inelastic??
Price Elasticity of Demand Formula
Example 1:

The quantity of a good demanded rises from 1000 to 1500 units when the price falls from $1.50 to $1.00 per unit. The price elasticity of demand for this product is approximately:
Price Elasticity of Demand is simply the proportionate change in demand given a change in price (A measure of consumer sensitivity).
If a one-percent drop in the price of a product produces a one-percent increase in demand for the product, the price elasticity of demand is said to be 1.

For most consumer goods and services, price elasticity tends to be between .5 and 1.5.
The price elasticity for most products clusters around 1.0.

Elastic goods: Higher than 1.0
Inelastic goods: Lower than 1.0
Unitary Elasticity: Around 1.0 (0.9-1.1)

Examples:
Goods that are more essential to everyday living, and that have fewer substitutes, typically have lower elasticities; staple foods are a good example.
Goods with many substitutes, or that are not essential, have higher elasticities.
Goods that are considered luxuries, or whose purchase can be easily postponed, often have elastic demand.
Elasticity of Demand Coefficient
Example 2:

The quantity of a good demanded falls from 2000 to 1800 units when the price rises from $1.25 to $2.00 per unit. The price elasticity of demand for this product is approximately:
The Elastic Slide
Example 1:

The quantity of a good demanded rises from 1000 to 1500 units when the price falls from $1.50 to $1.00 per unit. The price elasticity of demand for this product is approximately:
Example 2:

The quantity of a good demanded falls from 2000 to 1800 units when the price rises from $1.25 to $2.00 per unit. The price elasticity of demand for this product is approximately:
Example 1= 1.5
(Elastic)
Example 2= .17
(Inelastic)
A measure of the impact of the Price Effect.
Price Effect= People buy less of something at higher prices than they would at lower prices.

When the Price Effect is LARGE, demand= ELASTIC
For cola, a small price change causes a large change in qty. demanded, so the demand for cola is ELASTIC

When the Price Effect is SMALL, demand= INELASTIC
For milk, a small price change causes only a small change in qty. demanded, so the demand for milk in INELASTIC
Review! Price Elasticity of Demand
Generally,
Steeper lines = more INELASTIC!
Flatter lines= more ELASTIC

While this is a helpful memory tool, do not rely on this alone. Understanding the concept should be the priority!
1. The law of demand implies, holding everything else constant, that as the price of yogurt
A) increases, the demand for yogurt will increase.
B) increases, the quantity of yogurt demanded will decrease.
C) decreases, the quantity of yogurt demanded will decrease.
D) decreases, the demand for yogurt will increase

2. An ________ is represented by a rightward shift of the demand curve while an ________ is represented by a movement along a given demand curve.
A) increase in demand; decrease in demand
B) increase in demand; increase in quantity demanded
C) decrease in demand; decrease in quantity demanded
D) increase in quantity demanded; increase in demand

3. A change in which variable will change the market demand for a product?
A) the price of the product
B) expected future prices
C) the number of firms in the market
D) the quantity supplied of the product

4. If the price of gasoline increases, what will be the impact in the market for public transportation?
A) The demand curve for public transportation shifts to the right.
B) The quantity of public transportation demanded increases.
C) The demand curve for public transportation shifts to the left.
D) The quantity of public transportation demanded decreases

5. Which of the following would cause the equilibrium price of ketchup to increase and the
equilibrium quantity of ketchup to decrease?
A) a decrease in the price of tomatoes
B) an increase in the price of tomatoes
C) an increase in the price of mustard, a substitute for ketchup
D) an increase in the price of french fries, a complement for ketchup
Example 3:

Based on the following information, calculate the price elasticity of demand for paper towels. At an initial price of $1, the quantity demanded is 10. At a price of $1.50, the quantity demanded is 3
Example 3:

Based following information, calculate the price elasticity of demand for paper towels. At a price of $1, the quantity demanded is 10. At a price of $1.50, the quantity demanded is 3
Example 3= 1.4
(Elastic)
Memory Tool: "Q over P"
Elastic goods: Higher than 1.0
Inelastic goods: Lower than 1.0
Unitary Elasticity: Around 1.0
Example: Oil
Elasticity of Demand Formula
Memory Tool: "Difference over Average divided by Difference over Average"
At an initial price of $10, the quantity demanded is 100. At a new price of $20, the quantity demanded falls to 90. What is the elasticity?
Make a Chart like this!
Example: At an initial price of $10, the quantity demanded is 100. At a new price of $20, the quantity demanded falls to 90. What is the elasticity?
ANSWER
Example 1
But how do we find the % change in quantity and price???
At an initial price of $1, the quantity demanded for Navel Oranges is 10. At a new price of $0.85, the quantity demanded rises to 16. What is the elasticity?
Make a Chart like this!
At an initial price of $1, the quantity demanded for Navel Oranges is 10. At a new price of $0.85, the quantity demanded rises to 16. What is the elasticity?
ANSWER
Example 2
Elasticity and Total Revenue
A firm's revenue= Price x Qty.

If Demand is Inelastic...
Price = Revenue

If Demand is Elastic...
Price = Revenue
Inelastic:
Elastic:
Formula:
https://soundcloud.com/user-367877730/the-elastic-slide-feat-hannah?in=user-367877730/sets/hiphoponomics-vol-2-the-man
Make a Chart like this!
.9
ANSWER
Example 3
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