Supply & Demand #4

Determinants of Elasticity

*Quiz on Thursday 3/20/2014*

Write the sentences correctly changing the underline word if necessary.

1. If the price of shoes goes up, demand for shoes will go up.

2. You will begin to experience diminishing marginal utility on your 3rd scoop of ice cream.

3.Pepsi & Coke are complementary goods.

Elasticity• Price of product is elastic if

there are dramatic changes in demand w/different prices– Name a product that you’d

STOP buying if the price doubled.

• Inelastic: not dramatic changes w/ different prices– Name a product that you’d

STILL buy if the price doubled.

What makes something elastic?

1. Are adequate Substitutes available?: more substitutes, more elastic in price

• If Tylenol doubles in price, what will consumers do?

• If gas doubles in price, what will consumers do?

2. Does purchase use a large portion of consumer’s

budget?• If toilet paper doubles in price, what

will most consumers do? – TP is a relatively small portion of income

(also, no substitutes)

• If cigarettes double in price, what will most smokers do?– Those addicted, will continue BUT new

smokers (teens) may never start b/c it’s a large chunk of their income

3. Time – Can purchase be delayed?

• Given time, new substitutes will be created

–Oil prices rise, w/time new technology will substitute for gas • EX: hybrids, electric cars, etc.• In short run – gas is inelastic • In long run – more elastic w/ more substitutes

ESSENTIAL QUESTIONWhy are airlines reluctant to offer reduced round-trip airfares during

holidays such as Christmas, Easter, and Thanksgiving?

Refer to at least 2 of the 3 determinants in your answer.