9/17/15 Topic: Elasticity of Demand EQ: What is elasticity, and why are some goods more elastic than others? Bellwork: Set up your Cornell notes. Then, answer the following question: What is the difference between change in quantity demanded and change in demand?

ELASTICITY OF DEMAND

ELASTICITY Elasticity of demand is a measure of how consumers react to a change in price Inelastic describes demand that is not very sensitive to a change in price Examples? Elastic describes demand that is very sensitive to a change in price Examples?

CALCULATING ELASTICITY Elasticity = Percentage change in quantity demanded / Percentage change in price Percentage change = (Original number – new number) / original number x 100 If elasticity of demand is less than 1, it is inelastic If elasticity is greater than 1, it is elastic Unitary elastic describes demand whose elasticity is exactly equal to 1; percentage change in quantity demanded is exactly the same as the percentage change in price

CALCULATING ELASTICITY Price decreases from $4 to $3 – percentage change of 25% (($4- $3)/$4 x 100 = 25) Quantity demanded increases from 10 to 20, a 100% increase ((10- 20)/10 x 100 = 100) Elasticity equals 4.0 (100/25 = 4.0), which is greater than 1, meaning demand is elastic Price decreases from $6 to $2, percentage change of 67% Quantity demanded increases from 10 to 15, percentage change of 50% 50/65 = 0.75, less than 1, meaning demand is inelastic

CALCULATING ELASTICITY Elasticity can change at price level; demand can be very elastic at one level, and inelastic at a different level If a magazine sells for $.20 and raises 50% to $.50, it is still inexpensive and people will buy as many copies as before—the demand is inelastic If a magazine increases 50% from $4.00 to $6.00, demand becomes more elastic because people will be less likely to purchase it at the new price, even though the percentage change is the same as before

FACTORS AFFECTING ELASTICITY If there are few, or no, substitutes for a good, demand will be relatively inelastic; if there are many substitutes, demand will be more elastic Relative importance of a good affects elasticity. Necessities are things people always buy, regardless of price. Their demand is relatively inelastic Luxuries are things people want, and vary greatly with price. Their demand is elastic.

ELASTICITY AND REVENUE A firm’s total revenue is the total amount of money a firm receives by selling goods or services When a good has an elastic demand, raising the price can actually reduce revenue; a reduction in price can sometimes increase revenue. Price of a slice of pizzaQuantity demanded per day Total revenue $.50300$150 $ $250 $ $300 $ $300 $ $250 $3.0050$150

ELASTICITY AND REVENUE If a firm sells a good that is inelastic, their total revenue will still be affected. If they increase price by 25%, demand will decrease, but by less than 25%. The decrease in sales will be counteracted by the increase in price, and total revenue will increase If they decrease price, they will experience an increase in demand. However, percentage demanded will not rise much, and total revenues will decrease

Price Total Revenue Elastic Demand Inelastic Demand

LET’S REVIEW!

PRACTICE! Use the elasticity formula to calculate the exact elasticity of demand in the following examples. Tell if, in each case, demand is elastic, inelastic, or unitary elastic. A. When the price of a deluxe car wash rises from $10.00 to $11.00, the number of daily customers falls from 60 to 48 B. A dentist with 80 patients cuts his fee for a cleaning from $60.00 to $54.00 and attracts two new patients