chapter 4 section 2. salt 2015 nissan gtr pork chops insulin (you’re diabetic) gas one day...
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ELASTICITY OF DEMAND
Chapter 4 section 2
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50% increase in price of:
Salt
2015 Nissan GTR
Pork chops
Insulin (you’re diabetic)
Gas one day after price increase
Gas one year after price increase
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What is Elasticity of Demand?
Elasticity of demand dictates how drastically buyers will cut back when a price rises or increase their demand for a good when the price falls
Elasticity of = % change in quantity demandedDemand % change in price
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What is Elasticity of Demand?
If the demand is not very sensitive to a change in price it is inelastic
If the demand is very sensitive to a change in price it is elastic
DP
Q
D
P
Q
P1
Q1 Q2
P2 =
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What Four Factors Determine Elasticity of Demand?
1. Number of substitutes2. Luxuries versus necessities3. Percentage of income spent on the good4. Time to adjust to the price change
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1. Number of Substitutes
A product with lots of substitutes tends to be elastic
A product with few or no substitutes tends to be inelastic
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Availability of Substitutes If your favorite musical group has
a concert and you want to attend, there really is no substitute for a ticket
Is a moderate change in price is not going to change your mind. Is your demand elastic or inelastic?
Inelastic
DP
Q
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2. Luxuries versus Necessities
Do you need it to survive? Heart medicine tends to be inelastic Coach purses tend to be elastic
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3. % of Income Spent on the Good
How expensive is it? Buyers are more responsive to price
changes for goods on which they spend a larger percentage of their income
P
QQ1
P1
Q2
P2 D
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Percentage of Income Spent on the Good Cont.
Buyers are less responsive to price changes for goods on which they spend a small percentage of their income If the price of chewing gum doubled, would
you cut back on buying gum? Your demand for gum is
inelastic
D
P
QQ1
P1
Q2
P2
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4. Time to Respond Price Change
Because consumers cannot respond quickly to price changes, their demand is inelastic in the short term
When a price changes, consumers often need time to change their shopping habits or find a substitute. Demand is elastic in the long run.
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Why is Elasticity Important?
Tells business owners how much a change in price will affect the bottom line
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Elasticity and Revenue
A company’s total revenue is the amount of money the company receives by selling its goods
Total revenue= price of goods X quantity sold
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Price Elasticity and the Total Revenue Test
In July Joe’s Pizza sells pizza for $2.50 a slice and sells 200 slices per day.
In August Joe raises his prices from $2.50 to $3 per slice, then the amount he sells would decrease from 200 to 100 slices a day.
Increase in Price resulted in an Decrease in Total Revenue! Joe’s pizza is ELASTIC
Price Quantity sold
Total Revenue
July 2.50 200 500
August 3.00 100
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Price Elasticity and the Total Revenue Test
John’s Pizza in Barrow, Alaska, also sells his pizza for $2.50 a slice and sells 200 slices a day.
If John raised his prices from $2.50 to $3 per slice, then the amount he sold would decrease from 200 to 175 slices a day.
Increase in Price resulted in an INcrease in Total Revenue! John’s Pizza is relatively INELASTIC for demand
Price Quantity sold
Total Revenue
July 2.50 200 500
August 3.00 175
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Movies tend to be unit-elastic
Unit-elastic means the % they increase the price is exactly equal to the % demand drops
trailer
Price Quantity sold
% change Qd% change price
Total Revenue
July 10 200 2000
August 15 100 1500
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Students complete Activity 1 and 2 with a partner Get out ONE piece of paper—2 people, 1
paper DO NOT WRITE ON ACTIVITY 1! DO NOT WRITE ON ACTIVITY 2!