#### 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
• 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
```