Transcript Elasticity
Elasticity of Demand How sensitive is demand? Slope of a Demand Curve • What does slope indicate about a product? • Do all demand Curves have the same slope? Demand Curves Slope of Demand Curve • Indicates the responsiveness of Quantity Demanded to a change in Price. • If the price of a good increases 20% => how much does QTY demand decrease? Elastic Goods Px • Elastic demand curves are flat D1 – Sensitive to price changes Qty • A ↑ Price leads to a greater ↓ in Qty Demanded Inelastic Goods • Inelastic goods are NOT sensitive to price changes • % Change in Price leads to a Smaller % change in Qty Demanded Inelastic Goods Px • Inelastic demand curves are steep – Not Sensitive to price changes D1 • A ↑ Price leads to a smaller ↓ in Qty Demanded Qty Elasticity depends on: • # of close substitutes • Necessity • Proportion of income spent • Time period Price Elastic or Price Inelastic? Gasoline Soda Price Inelastic Price Elastic No real substitutes Many substitutes Heart Surgery Table Salt Price Inelastic Price Inelastic Necessity & No real substitutes, Short time period Small proportion of income, no good substitute Elastic Goods Inelastic Goods Why does a business Care? • Total Revenue • Price * Quantity = Total Revenue Elasticity determines the effect on total revenue Total Revenue & Inelastic Demand Total Revenue & Elastic Demand Total Revenue Profit Total Revenue - Total Expenses = Profit What you need to know! • More elastic demand curves are flat • Elastic means Qty D is sensitive to Px Changes • Total Revenue => Prices elastic goods • Total Revenue => Prices inelastic goods Elasticity of Demand Practice Problems PROBLEM #1 • Consider the degree of elasticity of demand for hard candy. Draw the Demand Curve for hard candy with your best educated guess about the proper slope for its elasticity/inelasticity. • Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$2 per pound Qty Demanded=1000 pounds • Now, imagine that Candy Manufacturers raise the price of a pound of candy from $2/pound to $4/pound; locate the new point on the demand curve that shows the quantity demanded at $4 per pound. • With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so. PROBLEM #2 • • • • Consider the degree of elasticity of demand for gasoline.Draw the Demand Curve for gasoline with your best educated guess about the proper slope for its elasticity/inelasticity. Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$3 per gallon Qty Demanded=gallons Now, imagine that Oil Manufacturers raise the price of a gallon of gasoline from $3/gallon to $5/gallon; locate the new point on the demand curve that shows the quantity demanded at $5/gallon. With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so. ELASTIC DEMAND INELASTIC DEMAND Total Revenue & Inelastic Demand . $10 Price increases from $6 to $10 Total Revenue increases from A to B $6 A = $10 * 18 = $180 D1 B = $6 * 20 = $120 . 18 20 Total Revenue & Elastic Demand Price D1 Quantity Elastic Goods • Elastic goods have demand which is very sensitive to price changes • A % Change in Price leads to a greater % change in Qty Demanded. Inelastic Demand Curve PRICE Quantity Elastic Demand Curve PRICE Quantity Inelastic or Elastic? Gasoline Soda Heart Surgery Table Salt Total Revenue & Inelastic Demand Total Revenue $10 $6 D1