D E M A N D

Chapter 4 Section 3

Elasticity of Demand

D E M A N D Objectives:

Explain how to calculate elasticity of demand. Identify factors that affect elasticity. Explain how firms use elasticity and revenue

to make decisions.

Group Work

Comp. Sub. Ind. Good

ToothpasteComputersPencilCoffeeDishwashing SoapChalk BoardBicycle

Section 1 Review/Quiz

1. What is Demand?

2. What is the Law of Demand?

3. What is the Substitution Effect?

4. What is the Income Effect?

5. Demand Curve is always _____ sloping to the ______!

6. What does the Demand Schedule and Demand Graph show?

Section 2 Review/Quiz

1. What does “Ceteris Paribus” mean?

2. What is the only thing that affects Change in Quantity Demanded?

3. Name the 6 factors that affect Change in Demand.

4. What is a complement? Give an example

5. What is a Substitute? Give an example

6. What is an Independent Good. Example

Section 2 Review/Quiz

1. “all other things held constant” 2. Price 3. Income, Inferior Goods, Consumer

Expectations, Population, Consumer Tastes & Advertising, Prices of Related Goods

4. 2 goods bought and used together 5. goods used in place of one another 6. an item that is neither a substitute or

complement

D E M A N D Focus:

List five products that you as a student could not live without.

Second how would your list change if those 5 products increased 10%, in price, then 20%, then 35%, then 50%?

D E M A N D Are there some goods that you would

always find money to buy, even if the price were to rise drastically?

Are there other goods that you would cut back on, or even stop buying altogether, if the price were to rise just slightly?

D E M A N D Economists describe the way that

consumers respond to price changes as elasticity of demand.

Elasticity of demand dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls.

D E M A N D Your demand for a good that will keep

you buying despite a price increase is inelastic or relatively unresponsive to price change.

D E M A N DINELASTIC

Unresponsive to price changesPrice Total Consumed

Price Total Consumed Arrows move in same directions! Example: Table Salt

D E M A N D IF you buy much less of a good after a small

price increase, your demand is ELASTIC A consumer with highly elastic demand

for a good is very responsive to price changes.

Example: Garden Vegetables

D E M A N D ELASTIC

Price Total Consumed

Price Total Consumed

Arrows move in opposite direction

D E M A N D UNITARY ELASTIC

Describes demand whose elasticity has a proportional change.Price Total Consumed Constant

Price Total Consumed Constant

No change in Total Revenue!

D E M A N D

D E M A N D Elastic Demand

D E M A N D Inelastic Demand

D E M A N D Type of Elasticity

Change Change in Movement of

in Price ExpenditurePrice/Expenditure

Elastic Opposite

Inelastic Same

Unit Elastic No Change - - - - - - -

D E M A N D Demand of Elasticity

Elastic Demand When given a change in price causes a relatively

larger change in QD. Inelastic Demand

When a given change in price causes a relatively smaller change in QD.

Unit Elastic When a given change in price causes a

proportional change in QD.

D E M A N D Elastic Demand: Price Quantity Total Revenue

Original Price: $ 3.00 (2 units) = $ 6.00 New Price: $ 2.00 (4 units) = $ 8.00

Inelastic Demand: Original Price: $ 3.00 (2 units) = $ 6.00 New Price: $ 2.00 (2.5 units) = $ 5.00

Unit Elastic: Original Price: $ 3.00 (2 units) = $ 6.00 New Price: $ 2.00 (3 units) = $ 6.00

D E M A N D Determinants of Demand Elasticity Can the purchase be delayed???

IF YES --- demand tends to be elastic IF NO --- demand tends to be inelastic

Are adequate substitutes available??? IF YES --- demand tends to be elastic IF NO --- demand tends to be inelastic

Does the purchase use a large portion of income??? IF YES --- demand tends to be elastic IF NO --- demand tends to be inelastic

D E M A N D Inelastic Demand - - such as Insulin

Price QD $ 20 7 units $ 15 7.5 units $ 10 7.8 units $ 5 8 units

D E M A N D Elastic Demand – such as garden vegetables

Price QD $ 20 3 units $ 15 7 units $ 10 17 units $ 5 25 units

D E M A N D Utility

A product’s use or how much satisfaction a person gets out of a product.

D E M A N D Marginal Utility

How much MORE a person will get out of adding one more unit of a product.

D E M A N D Diminishing Marginal Utility

The satisfaction (or utility) obtained from consuming a good declines as more units of the goods are consumed.