Economics – Fall 2013

What is elasticity of demand? How can a demand curve be used to determine elasticity of demand? What factors affect elasticity? How do businesses use elasticity and revenue to make decisions?

Is the demand curve/schedule the same for ALL different goods and services? With a buddy, brainstorm a list of at least FIVE goods/services that people will continue to buy no matter what the change. You ALSO need to brainstorm a list of five goods/services that people will STOP buying if the price goes up even a little bit.

How much quantity demanded will change due to a change in price. Why do we care? Analysis of demand sensitivity with respect to prices of goods and income helps the business to forecast market trends in future There are two types of elasticity… elastic and inelastic

Elastic demand = a small change in price creates a very large, opposite change in quantity demanded In other words… A small increase in price causes a large decrease in the quantity demanded A small decrease in price causes a large increase in the quantity demanded Elastic demand is like a rubber band…

Elastic curves are ALMOST completely horizontal!

What causes elastic demand…? Something is elastic when: Not a necessity Lots of substitutes The cost is a big part of someone’s budget You don’t need it immediately

Inelastic demand = a change in the price has very little effect on the quantity demanded In other words… A very large change in price (in either direction) has very little effect on the quantity demanded Inelastic demand is like a pencil…

Perfectly inelastic

What causes inelastic demand…? Something is inelastic when It is a necessity There aren’t many substitutes for it The cost is a small part of someone’s budget You need it immediately

Total revenue! The method to help us determine if the demand is elastic or inelastic. Total revenue = the total income a business receives from selling its products Total revenue = Price x Quantity Demanded If total revenue goes up  inelastic demand If total revenue goes down  elastic demand

Total revenue! A company’s total revenue is the total amount of money the company receives from selling its goods or services. Businesses need to be aware of the elasticity of demand for the good or service they are providing. If a good has an elastic demand, raising prices may actually decrease the firm’s total revenue.

Price per sandwichQuantity demandedTotal revenue $5.0010,000$50,000 $4.5022,500$101,250 $4.0030,000$120,000 $3.5031,250$109,375 $3.0032,500$97,500 $2.5033,750$84,375 Can demand for something be both elastic and inelastic…?

Price per gallonQuantity demandedTotal revenue $ ,000 $ ,000 $ ,832 $ ,213 $ ,983 $ ,043

Some goods/services have demand that depends a lot on prices – this is elastic demand Some goods/services have demand that depends very little on prices – this inelastic demand Goods/services with elastic demand tend to have the same qualities… same for goods/services with inelastic demand Vocab: Elasticity of demand Elastic demand Inelastic demand Total revenue