Microecon – Unit 2 Part 3

You have a group of average consumers. Let’s say they all have a favorite gum… which normally costs 50¢. Would most of these consumers still buy the gum if the price rose to 75¢?

Same group of consumers. Some years they go on their favorite vacation with their wives…...which normally costs $1,000. Would most of these consumers still go if the price rose to $1500?

50¢ to 75¢ $1,000 to $1,500 What’s the percentage change in the price for the gum? What’s the percentage change in the price for the vacation?

Economists examine this idea…. How will the demand for an item/service change when the price is changed? If the price goes up… will consumers buy less or none at all? will consumers buy the same amount?

This is called…. Elasticity examines….will the quantity consumed change if the price goes up…or if the price goes down? If the price goes up… Elasticity is the responsiveness of one variable to changes in another variable, ceteris parabis (other things equal).

If the quantity demanded changes we call the demand elastic. If the quantity demanded does not change we call the demand inelastic. PP Q Q10 m $1 $2 $3 D $ $ $ D INELASTIC ELASTIC

There are characteristics of goods/services that can make their demand tend to be more elastic or more inelastic. Use your intuition to decide if each makes the demand more elastic or inelastic. Copy this chart into your notes.

ElasticInelasti c

ElasticInelasti c many substitutes Will a change in the price of Dasani bottled water make a difference in the quantity demanded? few substitutes

ElasticInelasti c many substitutes few substitutes

ElasticInelasti c luxury Will a change in the price of insulin make a difference in the quantity demanded? necessity

ElasticInelasti c many substitutes few substitutes necessityluxury 6.

ElasticInelasti c inexpensive Will a change in the price of pens make a difference in the quantity demanded? expensive

ElasticInelasti c many substitutes few substitutes necessityluxury inexpensive expensive 6.

ElasticInelasti c non-habit forming Will a change in the price of coffee make a difference in the quantity demanded? habit-forming

ElasticInelasti c many substitutes few substitutes necessityluxury inexpensive expensive non-habit forming habit-forming 6.

ElasticInelasti c shorter time period Let’s say your refrig broke…would a change in the price of refrigs make a difference in the quantity demanded? longer time period

ElasticInelasti c many substitutes few substitutes necessityluxury inexpensive expensive non-habit forming habit-forming longer time period shorter time period 6.

In addition to characteristics of products that tend to make demand for them be more elastic or inelastic… There is also the Total Revenue Test which will tell you if demand is elastic or inelastic. Total Revenue =quantityprice x

Let’s say there’s only one nail salon… in town where you could adorn your nails with this lovely design…..or the very popular French nail manicure…

Let’s say the nail salon changed the price of its manicures and found the following: pric e quantity $10 $15 $30 15 To apply the total revenue test, we see what happened to TR when P . 5 1

So what is total revenue? Total Revenue =pric e quantity $10 $15 $ With manicures, when the price went up the TR went down. So was the demand for manicures elastic (responsive) or inelastic? x $150 $30 $75

Total revenue test P , TR  P , TR  P , TR  P , TR  ElasticInelasti c many substitutes few substitutes necessityluxury inexpensive expensive non-habit forming habit-forming longer time periodshorter time period 6.

Give 2 or 3 reasons to explain why demand for these products / services is more elastic or inelastic.

P Q D enchiladas $2.50 $12.50 $7.50 $5.00 $10.00 $ So why does it matter if demand is more elastic or more inelastic? D coffee S Which demand is relatively more inelastic? enchiladas & coffee

P Q D enchiladas $2.50 $12.50 $7.50 $5.00 $10.00 $ at P = $7.50 how many cups of coffee are demanded? how many enchiladas? D coffee S enchiladas & coffee Let’s say the gov’t imposed a tax on pound of coffee sold by mfg’s to stores & on every enchilada sold from distributors to restaurants. What shifts? S1S1

P Q D enchiladas $2.50 $12.50 $7.50 $5.00 $10.00 $ D coffee S enchiladas & coffee Enchiladas P = ______ & Q = _______ Coffee P = ______ & Q = _______ S1S1 $ $

P Q D enchiladas $2.50 $12.50 $7.50 $5.00 $10.00 $ D coffee S enchiladas & coffee Enchiladas P = ______ & Q = _______ Coffee P = ______ & Q = _______ S1S1 $ $ Because the demand for coffee is more _________, coffee makers are able to pass more of the _____ on to consumers. inelastic tax