Elasticity

What is elasticity ?• We will discuss Elasticity for both demand and supply• Elasticity of Demand – how drastically buyers will decrease or

increase buying of a good when the price rises or falls.• Different types of elasticity: (are you flexible on purchases or not?)• Elastic Demand = demand is very SENSITIVE to price change –

meaning consumers will drastically change demand if price rises or falls – You are flexible when it comes to buying – price place a big role in choices – There is a formula for calculating elasticity, which we will cover in a few slides (% change greater than 1)

• Ex: If the price of 20oz Cokes increases 10%, you are no longer willing to buy it – you are elastic (flexible) when it comes to buying Coke, and will buy Big K instead

What is Elasticity?• Inelastic Demand= Demand typically will NOT

change drastically or you are unresponsive to a price change – You are NOT flexible when it comes to that product - meaning you’re still likely to buy at any price – We will learn how to calculate ( % change less than 1).

• Ex: You are VERY loyal to AVON makeup, and will only buy that brand, even if the prices keep increasing

How do you calculate elasticity

• To get the elasticity, you must first determine your % change in quantity demanded and percent change in price, then use those numbers to calculate elasticity

• Formulas• Step 1 – calculate the change of your quantity and the change

of price – You must do this TWICE• Percent Change = Original (old) # - New # x 100

Original (old) #Step 2 – take the two calculations (one for QD and one for price)

and plug it into this formula.• Elasticity = % change in quantity demanded

% change in price

What does the % of elasticity tell us

• If the elasticity is EQUAL to 1, then the elasticity is UNITARY – meaning there was NO CHANGE.

• If the elasticity is > (less) than 1, then the elasticity is INELASTIC – meaning you did not budge much – you still bought it

• If the elasticity is < (greater) than 1, then the elasticity is ELASTIC – meaning you really changed your demand on that good

Necessities v. Luxuries

• Necessities tend to be INELASTIC – b/c you will always demand them at any given price

• Ex: Gas, Milk, bread, formula, heating/air,• Luxuries tend to be ELASTIC – b/c you can live

without them• Ex: Cars, name brands (sometimes, if you aren’t

loyal), Perfumes, Outings (restaurant, bowling, etc)• Habits/Addictions also tend to be INELASTIC• Ex: Cigarettes, gambling,