1. How sensitive is demand?
Elasticity of Demand
How sensitive is demand?

2. Slope of a Demand Curve What does slope indicate about a product?
Do all demand Curves have the same slope?
Demand Curves

3. Slope of Demand Curve
Indicates the responsiveness of Quantity Demanded to a change in Price.
If the price of a good increases 20% =>
how much does QTY demand decrease?

4. Elastic Goods Elastic demand curves are flat
Sensitive to price changes
A ↑ Price leads to a greater ↓ in Qty Demanded D1 Px
Qty

5. Inelastic Goods Inelastic goods are NOT sensitive to price changes
% Change in Price leads to a Smaller % change in Qty Demanded

6. Inelastic Goods Inelastic demand curves are steepPx
Qty
Inelastic demand curves are steep
Not Sensitive to price changes
A ↑ Price leads to a smaller ↓ in Qty Demanded

7. Elasticity depends on:
# of close substitutes
Necessity
Proportion of income spent
Time period

8. Price Elastic or Price Inelastic?
Gasoline
Soda
Price Inelastic
No real substitutes
Price Elastic
Many substitutes
Heart Surgery
Table Salt
Price Inelastic
Necessity &
No real substitutes,
Short time period
Price Inelastic
Small proportion
of income, no good
substitute

10. Elastic Goods
Inelastic Goods

11. Why does a business Care?
Total Revenue
Price * Quantity = Total Revenue
Elasticity determines the effect on total revenue

12. Total Revenue & Inelastic Demand
Price $6 to $10; Quantity Demanded goes from 8 to 6

13. Total Revenue & Elastic Demand
Bus fare $1.00 to $1.50; Quantity Demanded from 50 to 20

14. Total Revenue - Total Expenses = Profit

15. What you need to know! More elastic demand curves are flat
Elastic means Qty D is sensitive to Px Changes
Total Revenue => Prices elastic goods
Total Revenue => Prices inelastic goods

16. Elasticity of Demand Practice Problems PROBLEM #1
Consider the degree of elasticity of demand for hard candy. Draw the Demand Curve for hard candy with your best educated guess about the proper slope for its elasticity/inelasticity.
Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$2 per pound Qty Demanded=1000 pounds
Now, imagine that Candy Manufacturers raise the price of a pound of candy from $2/pound to $4/pound; locate the new point on the demand curve that shows the quantity demanded at $4 per pound.
With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

17. PROBLEM #2
Consider the degree of elasticity of demand for gasoline.Draw the Demand Curve for gasoline with your best educated guess about the proper slope for its elasticity/inelasticity.
Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$3 per gallon Qty Demanded=gallons
Now, imagine that Oil Manufacturers raise the price of a gallon of gasoline from $3/gallon to $5/gallon; locate the new point on the demand curve that shows the quantity demanded at $5/gallon.
With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

18. ELASTIC DEMAND
INELASTIC DEMAND

19. Total Revenue & Inelastic Demand.
Price increases from $6 to $10
Total Revenue increases from A to B
A = $10 * 18 = $180
B = $6 * 20 = $120
$10 $6 D1 18 20

20. Total Revenue & Elastic Demand
Price D1
Quantity

21. Elastic Goods
Elastic goods have demand which is very sensitive to price changes
A % Change in Price leads to a greater % change in Qty Demanded.

22. Inelastic Demand Curve
PRICE
Quantity

23. Elastic Demand Curve
PRICE
Quantity

24. Inelastic or Elastic?
Gasoline
Soda
Heart Surgery
Table Salt

25. Total Revenue & Inelastic Demand
$10 $6 D1