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EconomicsMr. KirbyCHSUnit 2: Lesson #3 Elasticity of Demand!

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

Warning2We will be using Cornell Note Taking Format Today!Smile and Own the Day!

Take one step at a time toSuccess in Economics class!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.

Lesson Three: Daily Learning TargetI Can define and explain in writing thefollowing key Economic concepts:

Diminishing Marginal UtilityElasticityElastic DemandInelastic DemandFactors Affecting Elasticity of Demand

Ill buy at 5 cents but not at 10 centsIf they are made from real lemons.10Not much business so Im going to lower my price to 5 cents.10 5QD1 D

QD2

Change in QDPrice changePoint to pointMovement

Lower the price & increase QDMovement, just movement, no shift

Demand does not refer to anumerical amount but to a behavior. Our willingnessto buy at various prices.QD is a numerical amountbased on a particular price.

QD is a value on the X axisand represented by a movement caused bya price change.Demand quantities of products that consumers are willing and able to buy at various prices during a given time period.DP1QD1 Change in QD [price change, point to point movement]QD3P3

P2

QD2And, what about Doris Day is she willing able at P2?. Lets ask her!

You have to be willing and able tobuy to be placed on the demand curve.And Sarah Palin willing & able at P3?

Would Prince be willing & able to buy at P1? Lets ask him!

Because Im willing WILLING, and Im able ABLE at P1.

Demand willing & able to buy

[Demand is the whole curve] [all prices] We have demand for something because weexpect it to be useful to us in satisfying our wantsDemand is constantly changing because of price and non-price factors such as [TIMER].

Taste Income Market sizeExpectations (future income, future price, & future availability)Related good price changes for substitutes & complements

D1D2D3

DP1

QD1

Change in Demand (curve) QD1

QD2QD2QD3P2

iPhone Demand willing and able to buy

Demand is a line and not apoint. It is a schedule of the amounts consumers arewilling and able to buy.

M. Jackson glovePower RangersParachute pantsOld JelliesDalmatian puppiesFurbysPogsTypewritersRAZR cell phonesCDs

40 million were sold

M. Jacksons popularity

Goods That Have Less Demand Than Years Ago

RAZR

1. New iPad2. Microsoft Surface3. Wii4. LCD monitors5. Photo messages6. Nintendo DS7. PS49. XBOX 36010. Flat Screen TVs11. PSPs12. Seven jeans13. Spiked hair15. iPhone 616. Samsung 5S17. Bratz Dolls18. Kindle Fire HDX

Name Goods That Have Greater Demand Today

PlayStation 3

WiiiPadXBOX 360

Hoodies

Bratz Dolls

Income EffectWhen things are expensive, money buys lessWhen things are cheap, money buys more

Substitution EffectWhen apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears

Diminishing Marginal UtilityEach 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 Im hungry, I typically will buy 2 breakfast tacos. The reason I dont 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

Three Reasons Why the Law of Demand ExistsDP1P2QD1QD1

Law of Diminishing Marginal Utility [DMU]

I would love a pair of shoes!I think I would rather spend my money on an iPad Mini!Wow!With each additional pair,he will get less utility andtherefore pay less.Not somuch!

An exception on this would be for women. They get just as much utility [if not more] out of the 50th pair of shoes as for the 1st pair.

Of course the new pairare a different color.Women buy 19,000 of the 20,000 pairs of shoes.Wal-Mart sells 20,000 pairs of shoes each hour.

American women spend $15 billion each year on shoes.American women spend $5 billion on foot problems.Women And Their Shoes

# of cookies consumedLets take a look at some examples ofDiminishing Marginal UtilityUtility [satisfaction]Im stuffed.I dont want any more![Disutility has set in!]

much utilitynot so much

.I ate one hamburger, and it tasted great. The next two tasted okay. I wish I hadnt have eaten the 5th. I cant finish the 6th. DIMINISHING MARGINAL UTILITYUtility (satisfaction) decreases as more of the same product is consumed.Disutility [or negative utility]?

About this time there is toilet trauma.

Or, inconvenienced afterward.5 Days Without Liquid

Too Much Relief?

Ill pay you $1 to drink another glass.Law of DMUAs an individual consumes more of a good, eventually MU will decrease.

Its been fun, but I think Im entering the diminished marginal utility [satisfaction] phase of our relationship.

Diminishing Marginal Utility In High School RomanceWhen the girl says, We need to talk, or the guy sendsa text message to end it, disutility has occurred.

Remember, Man Law #1 (affectionately referred to as the weasel clause)says:. Text, Skype, Tweet orPhoto Message her!I cant get no satisfaction [utility] any more.I know what love is.

The Weasel Clause: Not In PersonA 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!

Whatever You Do, Do Not Break Up In PersonMaybe she should tweet also because she might get this!

Of course, you might get this!

Welcome to DumpsvillePopulation UExactly what do you tweet if you want to break up?Here it is!!!

Why does attraction towards ones wifereduce as years of married life increase?Diminishing Marginal Utility!!!.The World Champion Hot Dog Eater: 69 Hot Dogs in 10 minutesThere are exceptions to Diminishing Marginal Utility. For instance, if you are.

Joey Chestnut, at 215 pounds before the contest (and 235 afterwards) won the Nathans Famous Hot Dog contestwith 69 hot dogs in 10 minutes. This contest has been heldevery year on July 4 since 1916. Typically, a single Nathanshot dog is very filling and 4 of them are an invitation todisaster. At 320 calories per dog, he put 22,080calories into his stomach in ten minutes, thus the 20extra pounds.

Joey Jaws Chestnut and 69 hot dogs

Sonya Thomas 40 dogs[won pink Pepto Bismol belt]Hot Dog Winner 7 Years In A RowHis Reward

Joey ate the equivalent of 1 dog every 8.6 seconds. For his victory, he received the coveted mustard-yellow champions belt and a one years supply of hotdogs from Nathans. The man he defeated earned $150,000 in one year for similar contests, including $25,000 for a winning appearance at the Glutton Bowl, in which he consumed 18 pounds of cows brains.

Symbolic of gastronomic greatness

Joey ate 103 Crystal Hamburgers and won $10,000.

Other eating accomplishments ofSonya at competitive eatingcontests are these:5.75 lbs. deep fried asparagus in 9 minutes.11 pounds of cheesecake in 9 minutes167 Chicken Wings in 32 minutes65 hard boiled eggs in 6 minutes, 40 sec.5 pounds of fruitcake in 10 minutes7 ( pound) hamburgers in 10 minutes9 pounds crawfish jambalaya in 10 minutes36 dozen Acme Oysters in 10 minutes23 pulled pork sandwiches in 10 minutes7 (3/4 pound) turkeys - 12 minutes 43 soft tacos - 11 minutes 89 meatballs - 12 minutes44 lobsters 12 minutes

Sonya Thomas [The Black Widow] at 98 pounds sets the Female Record at 40

And 38 Moon Pies 8 minutes

Gas prices keep rising but we keepbuying!

Doesnt the law of demand state thatconsumers buy less at higher prices?So, why are we still buying gas?

Elasticity of DemandElasticity 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.

Think pants. These pants haveinelastic waistbands. The waistbandsdo not change if people gain weight.

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

Think pants again! Sweat pants haveelastic waistbands. The pants changedepending on the size of the person.

Our demand for apple juiceis elastic. If the price increases,we will buy less. Our demandchanges.

So, why is our demand for apple juiceelastic and our demand for gasolineinelastic?Factors Affecting Elasticity of DemandThe following are factors that can affect the elasticity of demand:

Availability of SubstitutesRelative ImportanceNecessities Versus LuxuriesTime (It takes time to find substitutes.)

Its obvious, isnt it? We can substitute orange juicefor apple juice.Therefore, we deal with a price increaseby substituting one product for anotherproduct.

However, we cannotsubstitute milkfor gasoline.

What is this graph telling us aboutelasticity of demand?

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.

Total Receipts Test

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

Total Receipts Test20 x $2 = $40.00

Total Receipts Test20 x $2 = $40

20 30 40 50$2$1InelasticElastic

30 x $1 = $30.0050 x $1 = $50Elastic or Inelastic(Total Receipts Test)

Elasticity of D the way price affects QD. Elastic - QD that is very responsive to price. Inelastic - a chg in price has little impact on QD.Elastic (flexible) DemandSubstitutes (butter)Luxury (mink coat)Expensive (car)Has durability (refrigerator)Lasts a long time (gas-guzzling car)

Inelastic (inflexible) DemandNo substitutes (milk)Necessity (insulin)Inexpensive (safety pin)No durability (pencil)Lasts only a short time (bread)

.Elastic Demand For Blank DVDs-$1DTotal Receipts Test$2.50x100,000=$250,000$1.50x600,000=$900,000 +$650,000

All made$250,000

SonySony$2.50Kodak$2.50Maxell$2.50

Memorex$2.50

Just $1.50

+25% QD-33% sales-$1

DTotal Receipts Test$2 = $30 bil.$1 = $20 bil. -$10 bil.

Inelastic Demand for Home Heating OilHeating oil is mostly used in NE U.S.to fuel furnaces and boilers.

Most houses are heated by natural gas or electricity.

Elasticity of Soft Drinks

Inelasticity of Milk

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

Elastic or Inelastic Demand

Elastic or Inelastic DemandElasticInelastic

How to Determine Total Receipts (Total Revenue)Price X Quantity Elastic Demand has larger total receipts at lower pricesInelastic Demand has larger total receipts at higher pricesUnit Elastic Demand has the same total receipts regardless of price

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

Elasticity and Pricing Policies

Understanding Elasticity helps business determine pricing strategies.If demand is elastic you lower prices to raise revenue.If demand is inelastic you raise prices to raise revenue .

GRAPHING SKILLS PRACTICE:Complete the DEMAND SITUATIONS worksheet BY YOURSELF. Turn directly into me. I want to personally check your level of understanding on these concepts.WHEN YOU ARE FINISHED.Skim through Unit two: Lesson One in the economics book (pages 97-104)Answer questions 1-7 (PAGE 104) on a piece of notebook paper and turn directly into me today. THIS CAN BE DONE IN PARTNERS!

Price per Frog# of Frogs DemandedTotal Receipts

$8.0012$96.00

$7.0015$105.00

$6.0020$120.00

$5.0025$125.00

$4.0030$120.00

$3.0040$120.00

$2.0050$100.00

$1.0060$60.00