Transcript Elastic Inelastic

Microecon – Unit 2 Part 3
You have a group of
average consumers.
Let’s say they all
have a favorite
gum… which normally costs 50¢.
Would most of these consumers
still buy the gum if the price rose
to 75¢?
Same group of
consumers.
Some years they go on
their favorite vacation
with their wives…
...which normally costs $1,000.
Would most of these consumers
still go if the price rose to
50¢ to 75¢
What’s the percentage change
in the price for the gum?
$1,000 to
$1,500
What’s the percentage change in
the price for the vacation?
Economists examine this idea….
How will the demand for an
item/service change when the
price is changed?
If the price goes up…
will consumers buy the
same amount?
will consumers buy less or none
at all?
This is called….
Elasticity is the responsiveness of
one variable to changes in another
variable, ceteris parabis (other
things equal).
Elasticity examines….will the quantity
consumed change if the price goes
up…or if the price goes down?
If the quantity
demanded does not
change we call the
demand inelastic.
P
If the quantity
demanded changes
we call the demand
elastic.
INELASTIC
P
ELASTIC
$300
$3
$2
$200
$1
$100
D
10 m
Q
D
100 200
500 Q
There are characteristics of
goods/services that can make their
demand tend to be more elastic or
more inelastic.
Use your intuition to decide if each
makes the demand more elastic or
inelastic.
Copy this chart into your notes.
Elastic
1.
2.
3.
4.
5.
6.
Inelasti
c
Elastic
Inelasti
c
few substitutes
many
substitutes
Will a change in the price of Dasani
bottled water make a difference in
the quantity demanded?
Elastic
1. many
substitutes
2.
3.
4.
5.
6.
Inelasti
c
few
substitutes
Elastic
necessity
luxury
Inelasti
c
Will a change in the price of insulin
make a difference in the quantity
demanded?
Elastic
1. many
substitutes
2. luxury
3.
4.
5.
6.
Inelasti
c
few
substitutes
necessity
Elastic
inexpensive
Inelasti
c
expensive
Will a change in the price of pens
make a difference in the quantity
demanded?
Elastic
1. many
substitutes
2. luxury
3. expensive
4.
5.
6.
Inelasti
c
few
substitutes
necessity
inexpensive
Elastic
Inelasti
c
habit-forming
non-habit
forming
Will a change in the price of coffee
make a difference in the quantity
demanded?
Elastic
1. many
substitutes
2. luxury
Inelasti
c
few
substitutes
necessity
3. expensive
inexpensive
4. non-habit
forming
5.
habit-forming
6.
Elastic
Inelasti
c
shorter time period
longer time period
Let’s say your refrig broke…would a
change in the price of refrigs make a
difference in the quantity
Elastic
1. many
substitutes
2. luxury
Inelasti
c
few
substitutes
necessity
3. expensive
inexpensive
4. non-habit
forming
5. longer time
habit-forming
6.
period
shorter time
period
In addition to characteristics of
products that tend to make demand
for them be more elastic or
inelastic…
There is also the Total Revenue Test
which will tell you if demand is elastic
or inelastic.
Total Revenue = price x quantity
Let’s say there’s only one nail salon…
in town where you
could adorn your
nails with this lovely
design…
..or the very popular
French nail manicure…
Let’s say the nail salon changed the
price of its manicures and found the
following:
pric
quantity
e
$10
15
$15
$30
5
1
To apply the total revenue test, we
see what happened to TR when P .
So what is total revenue?
Total Revenue = pric
e
$10
$150
x quantity
15
$75
$15
5
$30
$30
1
With manicures, when the price went up
the TR went down. So was the demand
for manicures elastic (responsive) or
inelastic?
Elastic
1. many
substitutes
2. luxury
3. expensive
Inelasti
c
few
substitutes
necessity
inexpensive
habit-forming
4. non-habit
forming
5. longer time period shorter time
period
Total
revenue
test
Total revenue t
6.
P , TR 
P , TR 
P , TR 
P , TR 
Give 2 or 3 reasons to explain why
demand for these products /
services is more elastic or inelastic.
enchiladas & coffee
P
$15.00
S
$12.50
$10.00
$7.50
$5.00
$2.50
D coffee
10 20 30 40 50
D enchiladas
Q
So why does it matter if demand is more
elastic or more inelastic?
Which demand is relatively more
enchiladas & coffee
P
$15.00
S1
$12.50
S
$10.00
$7.50
$5.00
$2.50
D coffee
10 20 30 40 50
D enchiladas
Q
at
P =say
$7.50
Let’s
the how
gov’tmany
imposed a tax on pound of coffee
cups
of mfg’s
coffeetoare
sold by
stores & on every enchilada sold
demanded?
how many
from distributors
to restaurants. What shifts?
enchiladas?
enchiladas & coffee
P
$15.00
S1
$12.50
S
$10.00
$7.50
$5.00
$2.50
D coffee
10 20 30 40 50
$10.0 & Q = _______
20
Enchiladas P = ______
0
$11.00& Q = _______
28
Coffee P = ______
D enchiladas
Q
enchiladas & coffee
P
$15.00
$12.50
S1 S
$10.00
$7.50
$5.00
$2.50
D coffee
10 20 30 40 50
Because the demand
for coffee is more
_________,
coffee
inelastic
makers are able to
pass more of the
tax on to
_____
consumers.
D enchiladas
Q
$10.0 & Q = _______
20
Enchiladas P = ______
0
$11.00& Q = _______
28
Coffee P = ______