2. I want to talk about two products for the next few minutes. Insulin andBicycles

4. Every morning, millions of diabetics give themselves a shot of insulin just to stay alive.

5. In the U.S., there are over 10 million diabetics, 110 million worldwide. (2001)

6. Now you say to yourself again, so what do insulin and bicycles have in common? Diabetics ride bicycles.

7. Questions What does Price Elasticity of Demand Measure? –A measure of how much the quantity demanded of a good responds to a change in the price of that good. What are some Determinants of Elasticity? –Proportion of Income –Availability of Substitutes –Necessities vs. Luxuries –Time

8. PP Q Q Insulin Bicycles 10 m $1 $2 $3 D $300 100 $200 200 $100 500 D

9. PP Q Q InsulinBicycles 10 m $1 $2 $3 D $300 100 $200 200 $100 500 D One has few substitutes and one has many? Few substitutesMany substitutes One is a necessity and the other is a luxury? NecessityLuxury One is expensive and the other is inexpensive InexpensiveExpensive INELASTIC ELASTIC

10. PP Q Q Insulin Bicycles 10 m $1 $2 $3 D $300 100 $200 200 $100 500 D PQ $310m $210m $110m PQ $300 100 $200 200 $100 500 x x = = TR $10m $20m $30m $30,000 $40,000 $50,000x x x x x x

11. Special Cases P P Q Q Perfectly Inelastic Ed = 0 Perfectly Elastic Ed = ∞

12. Determinants of Demand Elasticity Can the purchase be delayed? Are Adequate Substitutes available? Does the Purchase use a large portion of income?

13. Total Revenue Test If a product has elastic demand a price increase will result in a decrease in Total Revenue If a product has inelastic demand a price increase will result in an increase in Total Revenue If a product has unit elastic demand a price increase or decrease will result in no change in Total Revenue

14. Total Revenue Test

15. ELASTICITY QUESTIONS 1. Mr. Lopez is a butcher who recently raised the price of steak at his market from $1.50 to $2.00 a pound. Correspondingly, his sales dropped from 200 pounds per day to 100 pounds per day. Figure out the elasticity of demand for steak at Lopez’ market. Is it elastic or inelastic?

16. 2. At 25 cents apiece, Mr. Smith sells 100 chocolate bars per week. If he drops his price to 20 cents, his weekly sales will increase to 110 bars. Is the demand for chocolate bars elastic or inelastic? Prove your answer.

17. 3. Suppose that 30 tons of coal are purchased at a price of $20 per ton and 50 tons are purchased at $15 per ton. What is the elasticity coefficient in this example?

18. Closure With a Partner come up with 5 products you believe will have Elastic Demand and 5 products that will have Inelastic Demand: ELASTICINELASTIC

19. ELASTICINELASTIC