ElasticityElasticity shows how sensitive

Quantity is to Change in Price.

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

3

4 Types of Elasticity1.Elasticity of

Demand

2.Elasticity of Supply

3.Cross-Price Elasticity (Substitute or Complement)

4.Income Elasticity (Normal or Inferior)

1. Elasticity of Demand

ElasticInelastic

PricePrice

QuantityQuantity

PricePrice

QuantityQuantity

% Δ Q

% Δ P

20%

5%35%

Ex. Ex.

6

Elastic or Inelastic

Explain why for each of the following.

1. Salt

2. New Cars

3. Pork Chops

4. European Vacation trip

5. Insulin

6. Insulin at one of four drugstores in a shopping mall.

1. Elasticity of Demand

Elastic Inelastic

1. Elasticity of Demand

Elastic Inelastic

1. Elasticity of Demand

ElasticInelastic

% Δ Q

% Δ P

Elastic Inelastic

PricePrice

QuantityQuantity

20%

20%

Unit Elastic

1

Inelastic Elastic

1. Elasticity of DemandTotal Revenue Test

TR = P x Q

Price

Price decreased and TR increased,

so…Demand is ELASTIC

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

elastic? Total Revenue 10 x 100 = $1000Total Revenue 5 x 225 = $1125

PricePrice

QuantityQuantity

A

B

% Δ Q

% Δ P100 225

10

5

Price increased and TR increased,

so…Demand is INELASTIC

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

elastic? Total Revenue 10 x 100 = $1000Total Revenue 8 x 110 = $880

PricePrice

QuantityQuantity

A

B

% Δ Q

% Δ P100 110

10

8

2. Elasticity of Supply

PricePrice

QuantityQuantity

PricePrice

QuantityQuantity

ElasticInelastic

% Δ Q

% Δ P

20%

5%35%

Ex. Ex.

2. Elasticity of Supply

Inelastic Elastic

% Δ Q

% Δ P

Elastic Inelastic

PricePrice

QuantityQuantity

20%

20%

Unit Elastic

1

Elasticity Coefficient for Demand & Supply

% Δ Q

% Δ P=

| Δ P |(Q1+Q2)/2

(P1+P2)/2

| Δ Q |

PBig-Psmall

(QBig+Qsmall)/2QBig-Qsmall

(PBig+Psmall)/2

PricePrice

QuantityQuantity

A

B

100 220

15

5

Elasticity Coefficient for Demand & Supply

% Δ Q

% Δ P

PricePrice

QuantityQuantity

A

B

100 220

15

5

=

15-5

(100+220)/2

(15+5)/2

220-100

=10

160

10

120

PBig-Psmall

(QBig+Qsmall)/2

QBig-Qsmall

(PBig+Psmall)/2

18

3. Cross-Price Elasticity

Complement

% Δ Q

% Δ PB

A

Substitute

19

3. Cross-Price Elasticity

% Δ Q

% Δ PB

A

Substitute

Complement

Complement Substitute

0

20

4. Income Elasticity

NormalInferior

% Δ Q

% Δ I

21

4. Income Elasticity

% Δ Q

% Δ I

NormalInferior

NormalInferior

0

Elasticity Practice

ElasticityPrice 1.25 1.00 0.75 0.50 0.25

Quantity 200 250 300 350 400

• The demand for video game tokens at the neighborhood arcade. Using the midpoints formula, between $.50 and $.25 the price elasticity of demand equals______?

• Suppose that Price = .75 currently. A decrease in price will do what to total revenue?

Price 10.50 9.50 8.50 7.50 6.50 5.50 4.50

Quantity

220 260 300 340 380 420 460

• Demand for prime rib. Using the midpoints formula, this demand curve is unit elastic between _______?

• This demand curve is price elastic from _______ to _______.

• Suppose that Price = $6.00, A 3% decrease in quantity demanded would require a ____ increase in price.

• Suppose that Price = $6.50 currently. A decrease in price will do what to total revenue.

AP Micro Free ResponseElasticity FRQ-Assume the following about laptop and desktop computers:• The demand for computers is price inelastic• Laptop and desktop computers have a cross price elasticity coefficient of +3.6• Computers and DVD burners have a cross price elasticity coefficient of -0.8• All computers have a income elasticity coefficient of +2.3

(a) Using correctly labeled graphs, show the impact of a change in technology that improves only the production of laptop computers on the following:

i. Price of laptop computers

ii. Output of laptop computers

iii. Total revenue of laptop computer producers

iv. Price of desktop computers

v. Output of desktop computers

(b) Using new correctly labeled graph, show the impact of a decrease in price of DVD burners on the following:

i. Price of computers

ii. Output of computers

(c) Using new correctly labeled graphs, show the impact on the following when income increases by 30%:

i. Price of computers

ii. Quantity of computers

iii. Price of DVD burners

iv. Quantity of DVD burners