2 D E M A N D Objectives: Explain how to calculate elasticity of demand. Identify factors that affect elasticity.Explain how firms use elasticity and revenue to make decisions.
3 Group Work Comp. Sub. Ind. Good Toothpaste Computers Pencil Coffee Dishwashing SoapChalk BoardBicycle
4 Section 1 Review/Quiz 1. What is Demand? 2. What is the Law of Demand? 3. What is the Substitution Effect?4. What is the Income Effect?5. Demand Curve is always _____ sloping to the ______!6. What does the Demand Schedule and Demand Graph show?
5 Section 2 Review/Quiz What does “Ceteris Paribus” mean? What is the only thing that affects Change in Quantity Demanded?Name the 6 factors that affect Change in Demand.What is a complement? Give an exampleWhat is a Substitute? Give an example6. What is an Independent Good. Example
6 Section 2 Review/Quiz 1. “all other things held constant” 2. Price 3. Income, Inferior Goods, Consumer Expectations, Population, Consumer Tastes & Advertising, Prices of Related Goods4. 2 goods bought and used together5. goods used in place of one another6. an item that is neither a substitute or complement
7 D E M A N DFocus:List five products that you as a student could not live without.Second how would your list change if those 5 products increased 10%, in price, then 20%, then 35%, then 50%?
8 D E M A N DAre there some goods that you would always find money to buy, even if the price were to rise drastically?Are there other goods that you would cut back on, or even stop buying altogether, if the price were to rise just slightly?
9 D E M A N DEconomists describe the way that consumers respond to price changes as elasticity of demand.Elasticity of demand dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls.
10 D E M A N DYour demand for a good that will keep you buying despite a price increase is inelastic or relatively unresponsive to price change.
11 D E M A N D INELASTIC Unresponsive to price changes Price Total ConsumedPrice Total ConsumedArrows move in same directions!Example: Table Salt
12 D E M A N DIF you buy much less of a good after a small price increase, your demand is ELASTICA consumer with highly elastic demand for a good is very responsive to price changes.Example: Garden Vegetables
13 D E M A N D ELASTIC Price Total Consumed Arrows move in opposite direction
14 D E M A N D UNITARY ELASTIC Describes demand whose elasticity has a proportional change.Price Total Consumed ConstantNo change in Total Revenue!
18 D E M A N D Type of Elasticity Change Change in Movement of in Price Expenditure Price/ExpenditureElastic OppositeInelastic SameUnit Elastic No Change
19 D E M A N D Demand of Elasticity Elastic Demand Inelastic Demand When given a change in price causes a relatively larger change in QD.Inelastic DemandWhen a given change in price causes a relatively smaller change in QD.Unit ElasticWhen a given change in price causes a proportional change in QD.
20 D E M A N D Elastic Demand: Price Quantity Total Revenue Original Price: $ 3.00 (2 units) = $ 6.00New Price: $ 2.00 (4 units) = $ 8.00Inelastic Demand:New Price: $ 2.00 (2.5 units) = $ 5.00Unit Elastic:New Price: $ 2.00 (3 units) = $ 6.00
21 D E M A N D IF YES --- demand tends to be elastic Determinants of Demand ElasticityCan the purchase be delayed???IF YES --- demand tends to be elasticIF NO --- demand tends to be inelasticAre adequate substitutes available???Does the purchase use a large portion of income???
22 D E M A N D Inelastic Demand - - such as Insulin Price QD $ 20 7 units
23 D E M A N D Elastic Demand – such as garden vegetables Price QD $ units$ units$ units$ units
24 D E M A N DUtilityA product’s use or how much satisfaction a person gets out of a product.
25 D E M A N D Marginal Utility How much MORE a person will get out of adding one more unit of a product.
26 D E M A N D Diminishing Marginal Utility The satisfaction (or utility) obtained from consuming a good declines as more units of the goods are consumed.