Elasticity of Demand

Today’s LEQ: How do you measure a consumer’s responsiveness to a change in price?

What is Elasticity?

Measures how much buyers and sellers respond to changes in market conditions

Elasticity of Demand

Measures how willing buyers are willing/able to change buying habits in response to a price change

Makes discussion of demand quantitative: How does a change in price impact quantity demanded for a given good or service? For example, gas prices dropped to $3.00

per gallon – how much will this change consumer behavior?

Elastic vs. Inelastic Demand Demand for a g/s

= elastic if QD changes substantially

Demand for a g/s = inelastic if QD changes slightly

Are you smelling what I’m stepping in?

Your classmates will drop each item to the ground from shoulder height. Which item is the most elastic/inelastic and why? Volleyball Basketball Softball Foam Ball Football

Phrase your answer in terms of price and quantity demanded.

Today’s Warm Up

It’s been a while since Monday… Refresh your memory by stringing together the terms below into a statement that recaps what you’ve learned about the elasticity of demand thus far:

Responsiveness, price change, demand, elasticity, inelastic, elastic

Determinants of Elasticity

No universal rule on determining elasticity – too many social, economic, psychological factors that come into play

4 general rules of thumb that can be helpful: Substitutability Proportion of Income Spent on Product Necessities vs. Luxuries Definition of the Market Time Horizon

Are you picking up what I’m putting down?

Using your understanding of the determinants of demand elasticity, rank the following g/s in order of most elastic to least elastic. Be prepared to defend your placement. Insulin Cigarettes Running Shoes Granny Smith Apples BMW convertible Gas

How do you calculate elasticity? There are two ways… simple and complicated

(we have to know both ways ) Simple way first:

This will give you the elasticity coefficient – the change in QD proportionate to the change in price

Use absolute value (eliminate (-) or (+) sign)

Got it?

For example, suppose a 10% increase in the price of an ice cream cone causes the amount of ice cream you buy to fall by 20%. Calculate the elasticity of demand using the simple formula.

One more to make sure…

For example, suppose a 20% increase in the price of tacos causes the amount of tacos you buy to fall by 5%. Calculate the elasticity of demand using the simple formula.

Welcome to Mrs. K’s Grocery Store

“Snicker Effect” Recap

Did the market demand for Snickers seem to be elastic or inelastic? How do you know?

Were the Snicker Bars an inferior good or normal good? How do you know?

Which goods were complements or substitutes? How do you know?

Video Clip

Add to your notes as you watch. You will be asked to revisit your brainstorming activity after the video. Be prepared!

http://youtu.be/4oj_lnj6pXA