2. 1 Elasticity

3. 2 “Demand Shifters” [TIMER] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future income–direct. about future availability-inverse, or about future income–direct. 5. Related Good *Prices [substitutes-direct] [complements-inverse] Changes in “D” [curve] 1. Non price change [“TIMER”] 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” QD-”single price”D-”all prices” [QD-”single price”; D-”all prices”] Complement [ inverse ] Substitute [ Direct ] Butter Bread Bagels P D3D3D3D3 D1D1D1D1 D3D3D3D3 QD 3 QD 1 QD 2 D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 QD 2 P2P2P2P2 D1D1D1D1 D2D2D2D2 D P

4. 3 What is Elasticity? A term economists use to describe sensitivity of quantity demanded or supplied to a change in price.

5. 4 quantity demanded price The percentage change in quantity demanded divided by the percentage change in price How do we measure the Price Elasticity of Demand?

6. 5 Price Elasticity of Demand E d = % change in Q d % change in P E d = % in Q d % in P

7. 6 Notes on E d E d negative, but ignore negative

8. 7 Classifying E d E d = 1 Unitary elasticity E d > 1 Elastic demand E d < 1 Inelastic demand

9. 8 Extreme elasticities E d = 0 Perfectly inelastic (vertical demand curve) E d =  Perfectly elastic (horizontal demand curve)

10. 9 D P Q Perfectly inelastic demand P Q D Perfectly elastic demand

11. 10 When consumers are very sensitive to a price change what does the demand curve look like? Very horizontal

12. 11 When consumers are less sensitive to a price change what does the demand curve look like? Very vertical

13. 12 135 64 90 75 220 70 4030 New.2-inelastic 50%10% 15050 2-elastic10% 20% 80200 0.33-inelastic75% 25% 12040 3-elastic.6/.2 20% 5/25 60% 60/100 10025 Initial Price Elasticity of Demand % change in P % change in Q d QuantityPrice E d = % in Q d % in P

14. 13

15. 14 What factors influence Demand Sensitivity (elasticity)? Number and closeness of Substitute goods % of income a good makes up Basic goods or “needs” Time to adjust

16. 15 What do substitutes have to do with sensitivity? The more substitutes a good has, the more sensitive consumers are to a price change

17. 16 A B D D Which demand curve is for spark plugs and which for Coca-Cola?

18. 17 The lower the % of ones budget a good is, the less sensitive consumers are to a price change What does % of income a good makes up have to do with sensitivity? SALT!

19. 18 The greater the need a good has to the consumer, the less sensitive the consumer is to a price change What do basic goods have to do with sensitivity? WATER!

20. 19 The more time to adjust, the more sensitive consumers are to a price change What does time have to do with sensitivity?

21. 20 elastic If demand is elastic - revenue goes down inelastic If demand is inelastic - revenue goes up If a college raises tuition, what happens to revenue?

22. 21 Elasticity and Total Revenue (TR) TR = PQ (price times quantity) E d = % change in Q d % change in P

23. 22 Q P D When prices are low, TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE So is total revenue

24. 23 Q P D Total revenue rises with price to a point... TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

25. 24 Q P D Total revenue rises with price to a point... then declines TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

26. 25 Q P D Total revenue rises with price to a point... then declines TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

27. 26 Q P D Total revenue rises with price to a point... then declines TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE Total Revenue Test

28. 27 Q P D Total revenue rises with price to a point... then declines InelasticDemand InelasticDemand TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE

29. 28 Q P D Total revenue rises with price to a point... then declines ElasticDemand Elastic Demand InelasticDemand TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE InelasticDemand

30. 29 Q P D Total revenue rises with price to a point... then declines ElasticDemand ElasticDemand InelasticDemand TR Quantity Demanded PRICE ELASTICITY & TOTAL REVENUE InelasticDemand Unit Elastic

31. 30 Summary, elasticity, price changes, and total revenue Total revenue falls Total revenue rises E d < 1 Total revenue rises Total revenue falls E d > 1 Total revenue same E d = 1 Price increase Price Decrease

32. 31 The percentage change in the quantity demanded of one commodity resulting from a 1 percent change in price of another commodity What is Cross Elasticity of Demand?

33. 32 E c = %  Quantity of X %  Price of Y Cross Elasticity of Demand

34. 33 E c If E c negative - complements (steak & steak sauce) E c If E c positive - substitutes (butter & margarine) E c Unrelated goods should have a E c close to zero

35. 34 The ratio of the percentage change in quantity demanded to the percentage change in income What is Income Elasticity of Demand?

36. 35 E i = %  Quantity %  Income E i > 0 Normal goods E i < 0 Inferior goods E i > 1 Luxury goods 0 < E i < 1 Necessities

37. 36 When does a good face an income elastic demand curve? A 1% change in income generates a greater than 1% change quantity demanded

38. 37 When does a good face an income inelastic demand curve? A 1% change in income generates a less than 1% change quantity demanded

39. 38 What is Price Elasticity of Supply? The ratio of the percentage change in quantity supplied to the percentage change in price

40. 39 E s = %  Q supplied %  Price E s = 1 Unitary E s > 1 Elastic E s < 1 Inelastic

41. 40 Extreme cases of E s E s = 0, perfectly inelastic (vertical supply curve E s = , perfectly elastic (horizontal supply curve) S P Q S P Q

42. 41 Does time effect Supply Elasticities? Yes! The more time, the more elastic the supply curve

43. 42 Which type of good would be best to tax to raise the most revenue? Goods that face a price inelastic demand curve will generate the most revenue

44. 43 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0101 0 10 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

45. 44 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0101 0 10 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

46. 45 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 012012 0 10 18 10 8 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

47. 46 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 01230123 0 10 18 24 10 8 6 0 1 2 3 4 5 6 7 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 1 2 3 4 5 6 7

48. 47 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123401234 0 10 18 24 28 10 8 6 4 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

49. 48 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 012345012345 0 10 18 24 28 30 10 8 6 4 2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

50. 49 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 01234560123456 0 10 18 24 28 30 10 8 6 4 2 0 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

51. 50 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 10 8 6 4 2 0 -2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

52. 51 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 10 8 6 4 2 0 -2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Observe Diminishing Marginal Utility