Elasticity Elasticity shows how sensitive quantity is to a change in price. Copyright ACDC Leadership 2015

ElasticityElasticity shows how sensitive quantity is

to a change in price.

Copyright ACDC Leadership 2015

HOW MUCH MORE OR LESS?DOES IT MATTER?

THE LAW OF DEMAND SAYS...Consumers will buy more when prices

go down and less when prices go up

2Copyright ACDC Leadership 2015

Price Elasticity of Demand (PED)Price Elasticity of Demand- • Measurement of consumers

responsiveness to a change in price.• What will happen if price increase? How

much will it effect Quantity Demanded

Who cares?• Used by firms to help determine prices

and sales• Used by the government to decide how to

tax Copyright ACDC Leadership 2015

Inelastic Demand


Inelastic Demand

•If price increases, quantity demanded will fall a little•If price decreases, quantity demanded increases a little.

In other words, people will continue to buy it.

20%

5%

INelastic Demand= Quantity is INsensitive to a change in price.

Examples:•Gasoline•Milk•Diapers

A INELASTIC demand curve is steep! (looks like an “I”)

•Chewing Gum•Medical Care•Toilet paper


Inelastic Demand

20%

5%

General Characteristics of INelastic Goods:

•Few Substitutes•Necessities•Small portion of income•Required now, rather than later •Elasticity coefficient less than 1


Elastic Demand


Elastic Demand

•If price increases, quantity demanded will fall a lot•If price decreases, quantity demanded increases a lot.

In other words, the amount people buy is sensitive to price.

Elastic Demand = Quantity is sensitive to a change in price.

An ELASTIC demand curve is flat!Examples:•Soda•Boats•Beef

•Real Estate•Pizza•Gold


Elastic DemandGeneral Characteristics of

Elastic Goods:• Many Substitutes• Luxuries• Large portion of income• Plenty of time to decide• Elasticity coefficient greater than 1


Elastic or Inelastic?Beef-

Gasoline- Real Estate-

Medical Care- Electricity-

Gold-

Elastic- 1.27INelastic - .20Elastic- 1.60INelastic - .31INelastic - .13Elastic - 2.6

What about the demand for insulin for

diabetics?

Perfectly INELASTIC(Coefficient = 0)

What if % change in quantity demanded equals

% change in price?

Unit Elastic (Coefficient =1)


D

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Elasticity Visualized

D D DD

D

Perfectly Inelastic

Elasticity Coefficient

0

Relatively Inelastic


<1

Unit Elastic


1

Relatively Elastic


>1

Perfectly Elastic


∞Copyright ACDC Leadership 2015

12

Total Revenue (P x Q)

D

Relatively Inelastic

SS1

D

Relatively Elastic

SS1

1. What happens to quantity for each when price increases?

2. What happens to total revenue for each when price increases?


Total Revenue TestUses elasticity to show how changes in price will

affect total revenue (TR). Ex: If the demand for gas is inelastic, what will happen to

total revenue for gas stations if price increases?

Inelastic Demand- • Price increase causes TR to increase• Price decrease causes TR to decrease

Elastic Demand- • Price increase causes TR to decrease• Price decrease causes TR to increase

Unit Elastic-• Price changes and TR remains unchanged


Is the range between A and B, elastic, inelastic, or unit elastic?

A

B

10 x 100 =$1000 Total Revenue

5 x 225 =$1125 Total Revenue

Price decreased and TR increased, so…

Demand is ELASTIC

125%

50%


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Other Types of Elasticity

Cross-Price Elasticity of DemandIncome Elasticity of Demand

Price Elasticity of Supply

https://www.youtube.com/watch?v=QLMJDo9dck0

Cross-Price Elasticity of Demand• Cross-Price elasticity of demand shows how sensitive

a product is to a change in price of another good • It shows if two goods are substitutes or complements

% change in price of product “a”% change in quantity of product “b”

• If coefficient is positive (shows direct relationship) then the goods are substitutes

• If coefficient is negative (shows inverse relationship) then the goods are complements

P increases 20% Q decreases 40%Q increases 40%


2008 udit Question 34

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2010 Question 6


• Income elasticity of demand shows how sensitive a product is to a change in INCOME

• It shows if goods are normal or inferior

% change in income% change in quantity

• If coefficient is positive (shows direct relationship) then the good is normal• If coefficient is negative (shows inverse relationship) then the good is inferior

Ex: If income falls 10% and quantity falls 20%…

Income increases 20%, and quantity decreases 15% then the good is a…

Income-Elasticity of Demand

INFERIOR GOOD


1. If the cross price elasticity coefficient of goods A and B is -5 and the income elasticity of good A is 2, which of the following is true?A.A decrease in the price of good A will decrease the demand for good BB.An increase in income will decrease the demand for good A C.Goods A and B are substitutesD.Good B is an inferior goodE.An increase in the price of A will decrease the demand for good B

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Practice Questions


Price Elasticity of SupplyPrice Elasticity of Supply- • Elasticity of supply shows how sensitive producers

are to a change in price.

Elasticity of supply is based on time limitations.Producers need time to produce more.

INelastic = Insensitive to a change in price (Steep curve)• Most goods have INelastic supply in the short-run Elastic = Sensitive to a change in price (Flat curve)• Most goods have elastic supply in the long-runPerfectly Inelastic Supply= Q doesn’t change Set

quantity supplied (Vertical line)Copyright ACDC Leadership 2015

1. Which of the following must be true for original Michelangelo sculptures?A.The demand is relatively elasticB.The supply is perfectly elasticC.The demand is perfectly inelasticD.The supply is perfectly inelasticE.The demand is perfectly elastic

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Practice Questions


Documents

Elasticity Elasticity shows how sensitive quantity is to a change in price. Copyright ACDC Leadership 2015