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Elasticity of Demand 3.3 Elasticity of Demand—is the degree to which changes in a good’s price affect the quantity demanded by consumers. Elastic Demand—Exists when a small change in a goods price causes a major opposite change in the quantity demanded. Elastic if: 1. Product is not a necessity 2. There are readily available substitutes 3. Products cost is a large portion of consumers income
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Elastic Demand 3.3 Ex. Pizza: 1. Not a necessity 2. Available substitutes(sandwiches, tacos) Student’s income—larger portion Elastic/Inelastic Demand?
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Inelastic Demand 3.3 Inelastic Demand—Exists when a change in a good’s price has little impact on the quantity demanded. Inelastic demand if: 1. The product is a necessity 2. There are few or no substitutes 3. Products cost is small portion of consumers income.
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Inelastic Demand 3.3 Ex. Salt: Why? 1. Necessity 2. Has few substitutes 3. Does not represent large portion of income Elastic/Inelastic? Why?
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Elasticity in Markets 3.3 Specific or General Product Market— Do you look at the overall big picture or the specific picture? Flour example: Overall flour market increases prices— inelastic because necessity, no subs, not overly expensive. Basha’s raises price of flour but others don’t—Flour at Basha’s is elastic
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Measuring Elasticity 3.3 Total Revenue—Total income that a business receives for selling its products. Monitor income after price changes can determine a products elasticity. Total Revenue and elastic demand— Ex. Harkins raises prices from $8.50 to $9.00 Price/Ticket up but total revenue down
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Total Revenue/Inelastic Demand A rise in a business’s total revenue because of a price increase indicates inelastic demand for business good or service. Ex. Harkins $8.50 to $9.00 and revenue increases.
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Maximizing Total Revenue 3.3 See Figure 3.6 Transparency At what point is revenue maximized?
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