2.  Because they lack a sufficient SUBSTITUTE!!!  Economists measure the reaction of consumers to changes in prices  This measurement is called….PRICE ELASTICITY OF DEMAND!!!!

3.  Goods that lack a sufficient substitute are considered “inelastic”.  This means that consumers must purchase these goods/services, no matter how high their price increases

4.  This is what an inelastic good/service looks like when graphed…..

5.  In order for a good to be considered inelastic, it must have a “value” of < 1…..  Here are some examples of inelastic goods…  Salt – 0.1  Matches – 0.1  Toothpicks – 0.1  Gasoline – 0.2  Coffee – 0.25  Tobacco products – 0.45  Automotive transportation – 0.2  Insulin – 0.1

6.  Goods that do have a sufficient substitute are considered “elastic”.  This means that if the price of an elastic good increases too much, then consumers will purchase a substitute good and be just as satisfied…

7.  This is what an “elastic” good looks like when graphed….

8.  In order for a good/service to be considered “elastic”, it must have a value > 1….some examples….  Private education – 1.1  Meals at a restaurant – 2.3  Ford cars – 4.0  Fresh Tomatoes – 4.6

9.  Calculating Elasticity of Demand  To calculate Elasticity….  [(Q2-Q1) / ((Q1+Q2) / 2 )] / [(P2-P1) / ((P1+P2) / 2] ….see board for clarification  Q2 = QUANTITY DEMANDED AT NEW PRICE  Q1 = QUANTITY DEMANDED AT ORIGINAL PRICE  P2 = NEW PRICE  P1 = ORIGINAL PRICE

10.  Calculate the price elasticity of these two goods….  #1 Insulin  Q1 = 12 injections per week, Q2 = 14 injections per week, P1 = $20.00 per injection, P2 = $10.00 per injection  Elasticity = -.23  Always take the absolute value =.23

11.  Calculate the price elasticity of ORANGE JUICE  PREDICTIONS? INELASTIC OR ELASTIC?  Q1 = 1 QUART PER WEEK  Q2 = 3 QUARTS PER WEEK  P1 = $2.50  P2 = $2.25  PRICE ELASTICITY = 9.52

12.  Yes!!!  If the government wants to establish a minimum price for a good/service, it is called a price floor.  If the government wants to establish a maximum price for a good/service, it is called a price ceiling.

13. PRICE CEILING PRICE FLOOR

14.  PRICE CEILINGS  Always BELOW equilibrium  Enacted to create shortages  What does this mean?  Keeps demand high  Benefits consumers  Producers lose money  Ex. Rent controls for apartments  PRICE FLOORS  Always ABOVE equilibrium  Enacted to create surpluses  Benefits Producers  Consumers lose – have to pay higher prices  Ex. Agriculture