Topic 4.3 Elasticity

3.3 Elasticity of Demand
Objectives
1. Explain how to calculate elasticity of demand.
2. Determine elasticity of demand from a demand schedule and a demand curve.
3. Identify factors that affect elasticity.

Are there some goods that you would buy no matter the price? Are there other goods that you would not buy if the price changed a little?

Elasticity of Demand – A measure of how consumers react to a change in price.

Inelastic – Describes demand that is NOT sensitive to a change in price.

EX: Gas, medicine, milk

Elastic – Describes demand that is very sensitive to a change in price.

EX: Restaurant meals, foreign travel, specific brands of toothpaste and pizza slices, potato chips





Graphic Examples
Elastic Demand (Chips) Inelastic demand (Gas)







Calculating elasticity of demand

Elasticity of demand = Percentage change in quantity demanded
Percentage change in price

Percentage change = Original number – New number
Original number



Calculation:
If the elasticity is greater than 1, then it is elastic
If the elasticity is less than 1, then it is inelastic
If elasticity is equal to 1, then it is called unitary elastic

Elastic Demand
% change in Qd = 10-20 = 1
10

% change in P = 4-3 = (1/4)
4

Elasticity = % change in Qd = 1 = 4, which is greater than one so gas is inelastic
% change in P (1/4)

Inelastic Demand
% change in Qd = 10-15 = (5/10) = (1/2)
10


% change in P = 6-2 = (4/6) =(2/3)
6

Elasticity = % change in Qd = (1/2) = (3/4)
% change in P (2/3)

(3/4) is less than one so chips are elastic

Four Factors Affecting Elasticity of Demand
1. Availability of substitutes - If there are few subs for a good, then if the price rises greatly, you still might buy it.

EX: Your favorite concert group and Aquafresh toothpaste

2. Relative importance - What percentage of your budget do you spend on goods and services?

EX: ½ your budget goes to clothes or the increase of price in toothpicks

3. Necessities vs. luxuries
i. Necessities tend to inelastic
EX: milk and medicine

ii. Luxuries tend to be elastic
EX: Steak and lobster dinners

4. Change over time - You need time to find subs for goods/services. So demand in short-run maybe inelastic and more elastic in long-run

EX: gas in the Summer of 2008

4.2 Notes Shifts in Demand

Topic 4.2 Shifts in the Demand Curve
Objectives
1. Understand the difference between a change in quantity demanded and a shift in the demand curve.
2. Identify several factors that determine demand and can cause a shift in the demand curve.
3. Explain how the change in the price of good can affect demand for a related good.

The demand schedule only took prices into account, while keeping all other factors the same, or constant. What if a government report came out that stated eating tomato sauce is the best way to cure a cold? What would happen to the demand of pizza?





Graphing Changes in Demand

Change in Quantity Demanded Demand shifting to left














Demand shift to right














Factors that cause the demand curve to shift

1. Income

Normal Good – A good that consumers demand more of when their incomes increase.

EX: New clothing, Roast beef sandwiches

Inferior Good – A good that consumers demand less of when their incomes increase.

EX: Used clothing, “mystery meat” sandwiches



Shift in Demand when your income increases

Used Clothing New Clothing













2. Consumer Expectations – Our expectations about the future affect are buying decisions now.

EX: A salesman tells you a bike you want will go on sale in one week so your demand for the bike now falls.

Demand for Bikes













3. Population
EX: After the baby boom, demand for bottles and baby food increased.

Demand for baby products after baby boom






4. Consumer Tastes and Advertising
EX: Nike pumps shoes, light up shoes (LA Lights), shoes with wheels.

Demand for Pumps after people thought they were not cool anymore













5. Price of Complements – Two goods that are bought and used together.
EX: Basketballs and basketball shoes

Demand for Basketballs after the price for basketball shoes goes up drastically












6. Price of Substitutes – Goods used in place of one another.
EX: Coffee and tea

Demand for coffee if the price of tea goes down

Topic 4.1 Demand schedule

4.1 Understanding Demand
Objectives
1. Explain the law of demand.
2. Understand how the substitution effect and the income effect influence decisions.
3. Create a demand schedule for an individual and a market.
4. Analyze the information presented in a demand curve.

Buyers demand goods, sellers supply those goods, and the interactions between the two groups lead to an agreement on the price and the amount traded.

Law of Demand – Consumers buy more of a good when its price decrease and less when its price increases.

Price Increase Quantity Demanded Decrease

Price Decrease Quantity Demanded Increase

The law of demand is explained by two patterns

Substitution Effect – When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

EX: The price of school pizza goes up so you eat bagels instead.

Income Effect – The change in consumption resulting from a change in real income.

EX: When the price of movie tickets goes up, it makes you feel poorer, so you buy fewer movie tickets.

You only demand goods that you can afford to buy. You may want a Lamborghini, but if you cannot afford one then you don’t demand it.

Demand Schedule – A table that lists the quantity of a good a person will but each different price.

Market Demand Schedule – A table that lists the quantity of a good all consumers in a market will buy at each different price.




Individual Demand
Price of a slice
of pizza ($) Quantity demanded
per day
.50 6
1.00 4
1.50 3
2.00 1
2.50 1
3.00 0

Market Demand (everyone in the classroom added together)
Price of a slice
of pizza ($) Quantity demanded
per day
.50 95
1.00 72
1.50 60
2.00 32
2.50 15
3.00 8

Graphing
Individual Demand Curve Market Demand Curve

Price on y-axis
Quantity Demanded on x-axis
Draw demand for both












The demand curve tells how quantity demanded will be affected by a change in price.