1. Elasticity of Demand Chapter 4 Section 3

2. Elasticity of Demand – dictates how drastically buyers will cut back or increase their demand of a good when the price rises or falls –Inelastic – will continue to buy –Elastic – buy less with a price increase

3. Elastic – Will buy less of, sensitive to price changes In Dollars Quantity Demand

4. Inelastic – keep buying despite price change Quantity Demanded In Dollars

5. Mountain Dew –1.50 increased to 2.00 –Still buy the same amount? Magazines –5.00 to 10.00 –Buy the same amount?

6. Elastic Demand curve –Price goes from 2.00 – 2.50 –Demand goes down by 1

7. Factors If there are few substitutes then even when prices rise you will still purchase the good (inelastic) –Life saving medicine Many substitutes will make a product (elastic) –Apples

8. Necessity vs. luxury –Varies person to person –Milk for example (necessity) Many families purchase milk regardless of price Demand for milk is inelastic –Steak (luxury) Families may cut back if steak jumps 50% Demand for milk is elastic

9. Demand over time Consumers do not always react quickly to a change in price –Takes time to find substitutes Inelastic –Over time the demand becomes elastic

10. 1970’s Oil crunch –People had large vehicles –Price of gasoline jumped –Could not find substitutes Inelastic –Over time people … Smaller cars, car pool, fuel efficient vehicles elastic

11. Total revenue and elastic demand Total revenue – amount of money the company receives by selling it’s goods –(Price of the good)*(quantity sold) Slices of PizzaQuantity Demanded Total Revenue.50300$150 1.00250$250 1.50200$300 2.00150$300 2.50100$250 3.0050$150

12. Total revenue and inelastic demand Higher mark up in price will make up for the lack of goods being sold If the company decreases the price they will lose revenue Slices of PizzaQuantity Demanded Total Revenue.50300$150 1.00250$250 1.50200$300 2.00150$300 2.50100$250 3.0050$150

13. Elastic Demand (apples) As the price is raised… Total revenue falls

14. Elastic Demand (apples) Total revenue rises As the price is lowered

15. Inelastic Demand (medicine) As price is lowered Total revenue falls

16. Inelastic Demand (medicine) As prices are raised Total Revenue rises