Transcript elasticity of demand - Bibb County Schools

ELASTICITY OF (LOVE) DEMAND
• Elasticity of (Love) Demand – describes
how consumers will react to a change
in the price of a good (action of a
person). Their reaction depends on the
original price of the good and the way
the good is used by consumers.
ELASTICITY OF DEMAND
• Elasticity of Demand –
– FOR EXAMPLE
• Are you the kind of person who loves in such a
way that your love can weather any kind of
storm? #3
• Some goods you will always find money to buy
even if the price were to rise drastically.
– Gasoline
– Feminine Products
• Other goods you would cut back on or cut out
all together.
– Vitamins (see question #4)
• Your demand for a good that you will
keep buying (KEEP LOVING) despite a
price increase is “INELASTIC.” “Your
demand does not change”
– Example – Gasoline increase in my truck
cost me $77.00 to fill up. I fill up 95% of the
time I buy gasoline. Therefore my demand
for gasoline (AT THIS POINT) is inelastic.
– If your love for him or her is still strong no
matter what he or she does your love is
INELASTIC!
• Your demand for a good that you will
NOT keep buying (OR KEEP LOVING)
with a price increase or you will buy
less is “ELASTIC.” “Your demand
changes”
– Example – I used to have text messaging
on my phone at $5.00/mo. for unlimited
texting. At $10.00/ mo. for unlimited texting
I got rid of text messaging. At this point I
am highly ELASTIC.
–DO NOT CALL ME CHEAP!!!!
–I AM SIMPLY ELASTIC, VERY
SENSITIVE TO PRICE CHANGES!
• 5 Factors Affecting Elasticity – certain
factors affect or determine what goods are
elastic or inelastic. (know the factors!)
– Availability of substitutes – if there are few
or no substitutes for a good when the price
rises you will more than likely still buy it.
• Example – See question 10!
• Disposable diapers – if two brands break your
baby out and one brand is the brand that your
baby can use your demand will more than likely
be inelastic because there are no available
substitutes.
– Availability of substitutes – if there are few or no
substitutes for a good when the price rises you
will more than likely still buy it.
• Example –
– Disposable diapers – if two brands break your baby out and
one brand is the brand that your baby can use your demand
will more than likely be inelastic because there are no
available substitutes.
– Cloth diapers or an available brand – if a person is willing to
use cloth diapers or happen to find another brand that does
not cause the baby to break out the demand for that brand of
disposable diapers become elastic.
– Relative Importance – If you spend a large
portion of your income on a good or if the good
is essential a price increase will force you to
make some choices. See question 11!
– Relative Importance – If you spend a large
portion of your income on a good or if the good
is essential a price increase will force you to
make some choices.
• Example –
– Car insurance on a newer vehicle – you have to have full
coverage if you financed it.
– Life insurance – if you are the primary breadwinner in your
home you HAVE to continue to provide for your family. The
older you get the higher an insurance premium.
– Necessities v. Luxuries – a necessity is a good
people will always buy even when the price
increases.
• Example – parents often regard milk as a necessity. If
the price of milk rises from $2.50 to $4.50 they will
still purchase milk. Their demand for milk is inelastic.
– Necessities v. Luxuries – a necessity is a good
people will always buy even when the price
increases. See question 6 & 7!
• Example – parents often regard milk as a necessity. If
the price of milk rises from $2.50 to $4.50 they will
still purchase milk. Their demand for milk is inelastic.
• Example – the same parents may regard steak as a
luxury. If the price of steak rises from $2.50 /lb. to
$4.50 /lb. they may decide not to eat steak. Their
demand for steak is elastic.
– Change Over Time – often when there is a price
increase consumers need time to adjust to the
increase. Until they can adjust their demand is
inelastic. Once they have had time to find
substitutes their demand becomes elastic.
Question13!
– Change Over Time – often when there is a price
increase consumers need time to adjust to the
increase. Until they can adjust their demand is
inelastic. Once they have had time to find
substitutes their demand becomes elastic.
• Example
– The baby has just used the last diaper. The mother runs to
the store and finds that the price of the disposals she uses
has increased by 30%. She has to buy right now because
she doesn’t have time to find an alternative brand. Her
demand is inelastic.
– Over the next few days she discovers an off brand diaper
that she has not previously tried. She buys a small package
and tries them on her baby. They work1 The baby doesn’t
break out! Her demand for the first brand now becomes
elastic because she has had time to find a substitute.
– Elasticity & Revenue – The elasticity in demand
determines how a change in prices affect a
firm’s total revenue.
• A firm’s total revenue is the amount of money the
company receives for selling its goods.
• Total revenue & Elastic demand – when the demand
of a good is elastic, raising the price of the good a
certain percentage will decrease the demand by a
larger percentage therefore a company will lose profit
/ revenue.
• Total revenue of Inelastic Demand – when the
demand of a good is inelastic, raising the price of the
good a certain percentage will decrease the demand
by a smaller percentage than the amount raised
therefore a company will increase profit / revenue.
• CALCULATING ELASTICITY –
(REMEMBER THIS FORMULA FOR
CALCULATING ELASTICITY) in order to
calculate elasticity take the percentage of
change in the demand of a good and
divide and divide the number by the
percentage of change in the price of a
good.
percentage of change quantity demanded
percentage of change in the price of a good
Look at the percentage of
change in quantity
demanded from .50 to .75
To find the percentage of
change in quantity or
price subtract the new
number from the original
number & divide the
result by the original
number
Price of
Snicker’s
.50 original
price
.75
Quantity
demanded
10 original
demand
7
1.00
5
1.25
4
1.50
2
2.00
0
Look at the percentage of
change in quantity
demanded from .50 to .75
Look at the percentage of
change in price from .50
to .75
To find the percentage of
.50 - .75 = -.25
change in quantity or
price subtract the new
. 25 /-. 50 = .50 x 100 = 50%
number from the original
number & divide the percentage of change quantity demanded
result by the original
number
percentage of change in the price of a good
10 - 7 = 3
3 / 10 = .3 x 100 = 30%
30/50 = .6