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Elasticity of Demand Unit 2.

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Presentation on theme: "Elasticity of Demand Unit 2."— Presentation transcript:

1 Elasticity of Demand Unit 2

2 Elasticity Elasticity means responsiveness

3 Elasticity of Demand How responsive the change in quantity demanded is when there is change in price

4 Equation: Elasticity of Demand
% Change in Quantity Demanded % Change in Price

5 Elastic Demand Significant change in quantity demanded with change in price When Elasticity is >1 Qd Qd P P

6 Elastic Demand Price Quantity D It’s sleepy

7 Elastic Examples A non-necessity Good with substitutes
Something that represents a big portion of your income

8 Inelastic Demand Minimal change in quantity demanded with change in price When Elasticity is <1 P Qd P Qd

9 Inelastic Demand Price Quantity D It looks like an “I”

10 Inelastic Examples A necessity Good with no substitutes
Something that represents a small portion of your income

11 Unitary Elastic % Change in Quantity Demanded = % Change in Price
Elasticity = 1 P Qd = P Qd =

12 Shifts in Demand Unit 2

13 Demand Review What is demand? What is the Law of Demand?
What makes demand have a downward slope?

14 Demand Curve Inverse relationship between price and quantity demanded Price Quantity D P Qd P Qd

15 Change in Quantity Demanded
Changes in price cause a change in quantity demanded Illustrated by moving from one point to another on the demand curve

16 Changes in Demand INCREASE in Demand: people are willing and able to buy MORE of a good AT EVERY PRICE LEVEL DECREASE in Demand: People are willing and able to buy LESS of a good AT EVERY PRICE LEVEL Illustrated by shifting the entire demand curve

17 Increase in Demand Price D2 D1 Quantity
INCREASE in demand shifts in the demand curve to the RIGHT Price Quantity D1

18 Decrease in Demand Price D1 D2 Quantity
DECREASE in demand shifts in the demand curve to the LEFT Price Quantity D1 D2

19 Why Demand Shifts: Determinants of Demand
Income Tastes and Preferences (FADS) Substitute Goods Complementary Goods Weather Number of Buyers Expectations

20 Income: Inferior vs. Normal Goods
Inferior Goods Demand decreases when income increases Demand increases when income decreases Normal Goods Demand increases when income increases Demand decreases when income decreases

21 Tastes and Preferences
Demand increases and decreases with changes in tastes/preferences Fads causes changes in demand Advertising influences consumers’ tastes

22 Price of Substitute Goods
If price of one good increases, the quantity demanded decreases. DEMAND for its SUBSTITUTE INCREASES If price of a good decreases, the quantity demanded increases DEMAND for its SUBSTITUTE DECREASES

23 Price of Substitute Goods
Price of of a Good Increases Quantity Demanded Decreases DEMAND for Substitute Good Increases Price of of a Good Decreases Quantity Demanded Increases DEMAND for Substitute Good Decreases

24 Price of Complementary Goods
If price of one good increases, the quantity demanded decreases. DEMAND for its COMPLEMENT also DECREASES If price of a good decreases, the quantity demanded increases DEMAND for its COMPLEMENT also INCREASES

25 Price of Complementary Goods
Price of of a Good Increases Quantity Demanded Decreases DEMAND for Complementary Good Decreases Price of of a Good Decreases Quantity Demanded Increases DEMAND for Complementary Good Increases

26 Weather Demand increases and decreases with changes in season/weather
Seasonal items

27 Number of Buyers INCREASE of # of buyers INCREASES demand
DECREASE of # of buyers DECREASES demand

28 Expectations Expectations for future income
Demand increases with expected increase in income Demand decreases with expected decrease in income

29 Expectations Expectations for future prices
If you expect prices to increase in the future, demand will increase now If you expect prices to decrease in the future, demand decreases now

30 Expectations Expectations for what product will do for you
If product will be good for you, demand increases If product will be bad for you, demand decreases

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