ELASTICITY OF DEMAND Elasticity of Demand – describes how consumers will react to a change in the price of a good. Their reaction depends on the original price of the good and the way the good is used by consumers. –FOR EXAMPLE

ELASTICITY OF DEMAND Elasticity of Demand – –FOR EXAMPLE Some goods you will always find money to buy even if the price were to rise drastically. –Gasoline – Feminine Products Other goods you would cut back on or cut out all together. –Vitamins –Cd purchases

Your demand for a good that you will keep buying despite a price increase is “INELASTIC.” “Your demand does not change” –Example –The gasoline increase in my truck cost me $77.00 to fill up. I fill up 95% of the time I buy gasoline. Therefore my demand for gasoline is inelastic.

Your demand for a good that you will NOT keep buying with a price increase or you will buy less is “ELASTIC.” “Your demand changes” –Example – I used to have text messaging on my phone at $5.00/mo. for unlimited texting. At $10.00/ mo. for unlimited texting I no longer have text messaging on my phone. At this point I am highly ELASTIC. –DO NOT CALL ME CHEAP!!!! –I AM ELASTIC, VERY SENSITIVE TO PRICE CHANGES!

CALCULATING ELASTICITY – (REMEMBER THIS FORMULA FOR CALCULATING ELASTICITY) in order to calculate elasticity take the percentage of change in the demand of a good and divide and divide the number by the percentage of change in the price of a good.

percentage of change quantity demanded percentage of change in the price of a good

Price of Snicker’s Quantity demanded.50 original price 10 original demand Look at the percentage of change in quantity demanded from.50 to.75 To find the percentage of change in quantity or price subtract the new number from the original number & divide the result by the original number

Look at the percentage of change in price from.50 to.75 To find the percentage of change in quantity or price subtract the new number from the original number & divide the result by the original number = 3 3 / 10 =.3 x 100 = 30% Look at the percentage of change in quantity demanded from.50 to = /-. 50 =.50 x 100 = 50% percentage of change quantity demanded percentage of change in the price of a good 30/50 =.6

5 Factors Affecting Elasticity – certain factors affect or determine what goods are elastic or inelastic. (know the factors!) –Availability of substitutes – if there are few or no substitutes for a good when the price rises you will more than likely still buy it. Example - Disposable diapers – if two brands break your baby out and one brand is the brand that your baby can use your demand will more than likely be inelastic because there are no available substitutes.

–Availability of substitutes – if there are few or no substitutes for a good when the price rises you will more than likely still buy it. Example – –Disposable diapers – if two brands break your baby out and one brand is the brand that your baby can use your demand will more than likely be inelastic because there are no available substitutes. –Cloth diapers or an available brand – if a person is willing to use cloth diapers or happen to find another brand that does not cause the baby to break out the demand for that brand of disposable diapers become elastic. –Relative Importance – If you spend a large portion of your income on a good or if the good is essential a price increase will force you to make some choices.

Example – –Car insurance on a newer vehicle – you have to have full coverage if you financed it. –Life insurance – if you are the primary breadwinner in your home you HAVE to continue to provide for your family. The older you get the higher an insurance premium. –Necessities vs. Luxuries – a necessity is a good people will always buy even when the price increases. Example – parents often regard milk as a necessity. If the price of milk rises from $2.50 to $4.50 they will still purchase milk. Their demand for milk is inelastic.

–Necessities v. Luxuries – a necessity is a good people will always buy even when the price increases. Example – parents often regard milk as a necessity. If the price of milk rises from $2.50 to $4.50 they will still purchase milk. Their demand for milk is inelastic. Example – the same parents may regard steak as a luxury. If the price of steak rises from $2.50 /lb. to $4.50 /lb. they may decide not to eat steak. Their demand for steak is elastic. –Change Over Time – often when there is a price increase consumers need time to adjust to the increase. Until they can adjust their demand is inelastic. Once they have had time to find substitutes their demand becomes elastic.

Example –The baby has just used the last diaper. The mother runs to the store and finds that the price of the disposals she uses has increased by 30%. She has to buy right now because she doesn’t have time to find an alternative brand. Her demand is inelastic. –Over the next few days she discovers an off brand diaper that she has not previously tried. She buys a small package and tries them on her baby. They work! The baby doesn’t break out! Her demand for the first brand now becomes elastic because she has had time to find a substitute.

–Elasticity & Revenue – The elasticity in demand determines how a change in prices affect a firm’s total revenue. A firm’s total revenue is the amount of money the company receives for selling its goods. Total revenue & Elastic demand – when the demand of a good is elastic, raising the price of the good a certain percentage will decrease the demand by a larger percentage therefore a company will lose profit / revenue. (see figure 4.8 pg. 95) Total revenue of Inelastic Demand – when the demand of a good is inelastic, raising the price of the good a certain percentage will decrease the demand by a smaller percentage than the amount raised therefore a company will increase profit / revenue.

UNDERSTANDING ELASTICITY OF SUPPLY Unlike consumers, suppliers have to make their products. Their ability to make more products during the time when prices increase determines whether or not a supplier is elastic or inelastic. Time is the main factor to determine whether or not a producer is elastic or inelastic.

Elasticity of Supply and Time – If a producer can increase his production to take advantage of a higher price the supply is elastic. A Baker can increase or decrease the amount of cakes baked in a day. His supply is elastic. –Marriott hotel wants to take advantage of three straight months of large conventions being held in Macon starting in May. Do they have time to add more rooms to their hotel? –If a producer cannot change his supply in a short period of time the supply is inelastic.

Elasticity of Supply and Time – If a producer can increase his production to take advantage of a higher price the supply is elastic. –Marriott hotel wants to take advantage of three straight months of large conventions being held in Macon starting in December Do they have time to add more rooms to their hotel? –If a producer can change his supply in a period of time to take advantage of the price increase the supply is elastic. Olympics is coming to Macon in Can the Marriott add more rooms to the hotel?

Elasticity of Supply measures the way SUPPLIERS respond to a change in prices. –If elasticity is greater than one supply is considered ________ –If Elasticity is less than one supply is considered ________ –If Elasticity is equal to one supply is said to be ___________. The change in quantity supplied Change in price