Macroecon – Unit 1

You have a group of average consumers.

Let’s say they all have a favorite gum…which normally costs

50¢.Would most of these consumers still buy the gum if the price rose to 75¢?

Same group of consumers.

Some years they go on their favorite vacation with their wives…which normally costs

$1,000.Would most of these consumers still go if the price rose to $1500?

50¢ to 75¢

$1,000 to $1,500

What’s the percentage change in the price for the gum?

What’s the percentage change in the price for the vacation?

Economists examine this idea….

How will the demand for an item/service change when the price is changed?

If the price goes up…

….will consumers buy less or none at all?

….will consumers buy the same amount?

This is called….

Elasticity examines….will the quantity consumed change if the price goes up…or if the price goes down?

Elasticity is the responsiveness of one variable to changes in another variable, ceteris parabis (other things equal).

If the quantity demanded changes we call the demand elastic.

If the quantity demanded does not change we call the demand inelastic.P P

Q Q10 m

$1

$2

$3

D

$300

100

$200

200

$100

500

D

INELASTIC ELASTIC

There are characteristics of goods/services that can make their demand tend to be more elastic or more inelastic.

Use your intuition to decide if each makes the demand more elastic or inelastic.

Copy this chart into your notes.

Elastic Inelastic1

. 2.

3.

4.

5.

6.

Elastic Inelastic

many substitutes

Will a change in the price of Dansani bottled water make a difference in the quantity demanded?

few substitutes

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

6.

Elastic Inelastic

luxury

Will a change in the price of insulin make a difference in the quantity demanded?

necessity

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

6.

Elastic Inelastic

inexpensive

Will a change in the price of pens make a difference in the quantity demanded?

expensive

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

6.

Elastic Inelastic

non-habit forming

Will a change in the price of cigarettes make a difference in the quantity demanded?

habit-forming

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

non-habit forming

habit-forming

6.

Elastic Inelastic

shorter time period

Let’s say your refrig broke…would a change in the price of refrigs make a difference in the quantity demanded?

longer time period

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

non-habit forming

habit-forming

longer time period

shorter time period

6.

In addition to characteristics of products that tend to make demand for them be more elastic or inelastic…There is also the Total Revenue Test which will tell you if demand is elastic or inelastic.

Total Revenue =

quantity

price x

Let’s say there’s only one local tatoo parlor

where you could adorn your body with this lovely design…

…or even a tatoo for kitty!

Let’s say the tatoo parlor changed the price of its tatoos and found the following:

price

quantity$100

$150

$300

15

To apply the total revenue test, we see what happened to TR when P .

5

1

So what is total revenue?

Total Revenue =

price

quantity$100

$150

$300

15

5

1

With tatoos, when the price went up the TR went down. So was the demand for tatoos elastic (responsive) or inelastic?

x

$1500

$300

$450

Total revenue test Total revenue testP , TR P , TR

P , TR P , TR

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

non-habit forming

habit-forming

longer time period

shorter time period6.

Give 2 or 3 reasons to explain why demand for these products/services is more elastic or inelastic.

the end

continue with overheads from AP guide

calculate arc elasticity coefficient

AP Macroecon workbook p. 38 in small groups

10 min

40 min