Elasticity

Measures how much buyers and sellers respond to a change in market conditions – Price changes – Income Changes – All other market changes

Elastic Good The change in quantity is more than the change in the market Quantity for a good is substantially impacted by a change in market conditions

Inelastic Good The change in quantity is less than the change in the market Quantity for a good is not substantially impacted by a change in market conditions

Factors that determine elasticity for Demand

Amount of Substitutes The less substitutes there are… The more substitutes there are… InelasticElastic

Necessities vs. Luxuries Your needs ElasticInelastic Your luxuries or wants

Definition of the Market Broadly Defined Market ElasticInelastic Narrowly Defined Market

Broadly Defined Market ElasticInelastic Narrowly Defined Market

Factors that determine elasticity of Supply

The type of resources that are used to produce the product play a major role in the elasticity of the good or service

Resources and Elasticity The harder the good or service is to produce, the more inelastic it is The easier the good or service is to produce, the more elastic it is.

BRAIN BUSTA! Think of an apple. What is the major resource that determines whether an apple is elastic or inelastic? TIME!

Short Run vs. Long Run Elasticity Short Run Supply is usually inelastic Long Run Supply is usually elastic

Also, any factors that impact the factors of production can effect elasticity of supply

Is the supply inelastic or elastic?

Price Elasticity A measure of how much quantity of a good responds to a change in the price of that good. In other words, the price change is the “change in the market.” – Price Elasticity of Demand How quantity demanded is impacted – Price Elasticity of Supply How quantity supply is impacted

For example Since the price of gasoline changes all the time but the quantity demanded for gasoline stays almost always the same, gasoline is price inelastic.

Partner Activity On a separate sheet of paper, write down any good or service you can think of. Then, specify whether the price increases or decreases Exchange your paper with another group Now, identify the price elasticity of supply and demand. Also, explain your answer. Write your names on the sheet that you answered.

Calculating Elasticity

% Change in Quantity % Change in Price

Inelastic or Elastic? If elasticity is greater than 1 = elastic If elasticity is less than 1 = inelastic If elasticity is 1 = unit elastic If elasticity is 0 = perfectly inelastic If elasticity is infinite = perfectly elastic

What do they mean? Perfectly Inelastic – Quantity stays the same no matter the price change. Perfectly Elastic – Quantity changes infinitely with any change in price. Unit Elastic – The percent change in quantity = the percent change in price

Practice The price of an ice cream cone increases by 40% and the amount the market buys falls by 60% Compute the price elasticity of ice cream cones What is the price elasticity? Elasticity = 1.5, therefore ice cream is elastic

Another way to look at this… The price of an ice cream cone increases by 40% and the amount the market buys falls by 60% Since the percent change in quantity is greater than the percent change in price, we can assume the good is elastic.

Midpoint Method (arc method) Used to identify % change

Computing by looking at market graph Price Elasticity = 3 (ignore all negatives) Demand is price elastic. $5 4 Demand Quantity Price Let’s say the price drops from $5 to $4. Is this good price elastic or price inelastic at that price change?

Worksheet Bonus Questions 1.At what price range is the good inelastic? 2.At what price range is the good elastic? 3.Why do you think this happens?

Elasticity and Graphing

Challenge Graph a typical demand curve for gasoline in the United States of America Graph a typical demand curve for Levi’s jeans. Graph a typical supply curve for doctors.

The Price Elasticity of Demand (a) Perfectly Inelastic Demand: Elasticity Equals 0 $5 4 Quantity Demand An increase in price leaves the quantity demanded unchanged. Price Challenge: When can this happen?

No substitutes!!

The Price Elasticity of Demand (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly $4, consumers will buy any quantity. 1. At any price above $4, quantity demanded is zero. 3. At a price below $4, quantity demanded is infinite. Challenge: When can this happen? (immeasurable)

Super Duper Paper Clip Company Many other companies that sell the exact same product If price is raised by the smallest amount, than buyers buy from another company If price is slightly lowered, than all buyers will buy from Super Duper Paper Clip Company.

ALL of the same rules apply when looking at supply!

Owner Challenge!!!

Looking at the information on the next slide, at what price would you earn the most revenue?

PriceDemand for Beef Jerky Purse Total Revenue $115 $210 $38 $44 $51

Do this! Total Revenue Quantity Demanded Price

Demand for Beef Jerky Purse Total Revenue $115 $210 $38 $44 $51 $15

PriceDemand for Beef Jerky Purse Total Revenue $115$15 $210$20 $38$24 $44$16 $51

Graphing Total Revenue Demand Quantity Q P 0 Price P × Q = $400 (revenue) $4 100 When the price is $4, consumers will demand 100 units, and spend $400 on this good.

Inelastic Goods and Total Revenue With an inelastic demand curve, total revenue usually increases as price increases.

How Total Revenue Changes When Price Changes: Inelastic Demand Demand Quantity 0 Price Revenue = $100 Quantity 0 Price Revenue = $240 Demand $1 100 $3 80 An Increase in price from $1 to $3 … … leads to an Increase in total revenue from $100 to $240

Elastic Goods and Total Revenue With an elastic demand curve, total revenue usually decreases as price increases.

How Total Revenue Changes When Price Changes: Elastic Demand Demand Quantity 0 Price Revenue = $200 $4 50 Demand Quantity 0 Price Revenue = $100 $5 20 An Increase in price from $4 to $5 … … leads to an decrease in total revenue from $200 to $100

$7 Demand is elastic ; demand is responsive to changes in price. Demand is inelastic; demand is not very responsive to changes in price. When price increases from $4 to $5, TR declines from $24 to $20. When price increases from $2 to $3, TR increases from $20 to $24. Elasticity is > 1 in this range. Elasticity is < 1 in this range. Price Quantity Price Range and Elasticity The higher the price, the more elastic the good is. The lower the price, the more inelastic the good is.

Other Demand Elasticities Income Elasticity of Demand – Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.

Other Demand Elasticities Remember, all elasticities are measured by dividing one percentage change by another

Income Elasticity differences Income Elasticity – Necessities, such as food and clothing, tend to have small income elasticities. – Luxuries, such as fur coats and diamonds, tend to have large income elasticities.

Other Demand Elasticities Cross-price elasticity of demand – A measure of how much the quantity demanded of one good responds to a change in the price of another good Compares the elasticities of compliment and substitute goods

Price elasticity of demand measures how much the quantity demanded responds to changes in the price. Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. – If a demand curve is elastic, total revenue falls when the price rises. – If it is inelastic, total revenue rises as the price rises. ELASTICITY REVIEW

The income elasticity of demand measures how much the quantity demanded responds to changes in consumers’ income. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to the price of another good. The price elasticity of supply measures how much the quantity supplied responds to changes in the price. ELASTICITY REVIEW

In most markets, supply is more elastic in the long run than in the short run. The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. The tools of supply and demand can be applied in many different types of markets. ELASTICITY REVIEW