A step by step guide to economic elasticity By Tom Gunnells Learning and Understand Elasticity of Demand Begin
The Three Parts of Elasticity There are three parts to understand when discussing Elasticity. Change in Quantity Demanded – What was the change in the demand of a given product? Change in Price – What was the change in price of a given product? What does a combination of the change of Price and a change in Demand tell us about an object? These are all questions that we will answer!
Think About Price If the price of the following goods went up $5, would consumers still buy them? House Car Candy Bar Whole Pizza 1 Bottle of Water Can of Pop Silly Band This is Elasticity! Learn More!
What would you like to learn about? Determining a Change in Price Determining a Change in Demand Determining Elasticity
Change in Quantity When a change in quantity is discussed, we are talking about the change in the quantity demanded of any good by a consumer. For this example, and all of the examples in the lesson, lets use a bottle of Gatorade sold in Mr. Tokars class. WhatAbbreviationNumber Original PriceP1$1 New PriceP2$2 Original QuantityQ160(Quantity sold at P1) New QuantityQ245(Quantity sold at P2)
Determining Change in Quantity Lets ignore the price when trying to figure change in quantity. Just focus on the number sold. Its easy to see that theres been a reduction of 15 Gatorades, but we need to find the percent change. To do that, well use the following formula New Quantity – Old Quantity (Old Quantity + New Quantity) /2 This can also be shown as | Q2-Q1 | _ (Q2+Q1)/2 ** What do the bars | | mean around the equation? Absolute value. Well always turn the number inside those bars to a positive when were done with the math inside of them. Q160 Q245
Determining Change in Quantity Lets put our numbers into the formula |Q2-Q1| _ |(Q2+Q1)/2| |45-60| (45+60)/2 15 (not -15) 52.5
Determining Change in Quantity 15 (not -15) 52.5 15/52.5 =.2857…. =.29 This tells us that there was a.29 change in quantity demanded This can also be expressed as a 29% change, and may be represented by Q, the Change in Quantity. Ready to try it on your own?
Quiz – Determine Change in Quantity QuantityDemanded Q1 (Old)45 Q2 (New)55 Remember the formula |Q2-Q1) (Q2+Q1)/2 -20 %-10 %15%20 % Back to Start
Incorrect Remember, the top line is always positive. Thats what the absolute value bars are for. Anything that comes out of |Q2-Q1| is always positive. Lets try it again. Retake Quiz
Incorrect Lets try this again - Remember, Q2=55, Q1=45 so, __55-45____ = 10 (Q2+Q1)/2 Retake Quiz
Change in Price When a change in price is discussed, we are talking about the change in the price of any good purchased by a consumer. For this example, and all of the examples in the lesson, lets use a bottle of Gatorade sold in Mr. Tokars class. WhatAbbreviationNumber Original PriceP1$1 New PriceP2$2 Original QuantityQ160(Quantity sold at P1) New QuantityQ245(Quantity sold at P2)
Determining Change in Price Lets ignore the quantity when trying to figure change price. Its easy to see that theres been a raise in price, but we need to find the percent change. To do that, well use the following formula New Price – Old Price (Old Price + New Price) /2 This can also be shown as | P2-P1 | _ (P2+P1)/2 ** What do the bars | | mean around the equation? Absolute value. Well always turn the number inside those bars to a positive when were done with the math inside of them. P1$1 P2$2
Determining Change in Price Lets put our numbers into the formula |P2-P1| _ (P2+P1)/2| |2-1| (2+1)/2 1__ 1.5 =.6666 or.67
Determining Change in Price So, what does.67 mean? There was a 67% change in price Are you ready to try it on your own? Price Quiz
Quiz – Change in Price Lets assume that lunch at school was originally sold for $1.50 The new price for lunch is $3.00 Find the % change in price using the following formula |P2-P1|__ (P2+P1)/2 50%67%100%200% Back to Start
Incorrect Remember, plug in the values for the correct variable. P2=$3.00 P1=$1.50 |P2-P1| should be |3-1.50| (P2+P1)/2 should be (3+1.50)/2 We are left with 1.50/2.25 Retake Quiz
Determining Elasticity To determine elasticity, youll need to know the skills that we learned in the first two sections. If you dont remember how to determine change in price and change in demand, In the last two lessons we learned how to determine: Change in Quantity, or Q Change in Price, or P We will use both of these numbers to calculate elasticity Go Back
Determining Elasticity To determine elasticity, we divide Q/ P Since we already know how to figure out Q/ P, lets use the following numbers Q= 20% P= 67% By dividing Q/ P, we get our PED (price elasticity of demand) So, 20%/67% =.30 But what does this all mean?
What does PED tell us The Price Elasticity of Demand ( Q/ P) tells us how consumers will respond to a price change of a good. Inelastic – The change in demand will be less than the change in price. PED<1 Elastic – The change in demand will be more than the change in price. PED>1 Unit Elastic – The change in demand and the change in price will be the exact same. PED=1 In our previous example, the Q/ P(PED) was.30 This means that our good was INELASTIC!
Inelasticity Inelastic – The change in demand will be less than the change in price. Example – Insulin - People who need insulin to help their body regulate sugar need it. It is not a choice. This is important medicine to them. The amount they demand will not change with price. Inelasticity is when PED<1
Elasticity Elasticity – The change in demand will be more than the change in price. Example – Orange Juice- No one needs Orange Juice. There are many substitutes available. If the price of OJ goes up to $20 a gallon, very, very few people will continue to buy OJ. Customers will buy other juices whose price remain low. Elasticity is when PED>1
Unit Elasticity Unit Elasticity – The percent change in quantity will be equal to the percent change in price. This is a good where the demand changes at the same rate of the price. It doesnt have many substitutes, but its also not a necessity. Some examples of Unit Elastic goods are cars, and airplane tickets. Elasticity is when PED = 1 Take the Quiz
A good has a PED of 8.31. Is this Elastic, Inelastic, or Unit Elastic? Elastic Inelastic Unit Elastic