Transcript Elasticity Demand

Elasticity

Make a list of 5 items you purchase each
month.
• Next to each item, put its price and the
quantity you purchase.
• Which items would you buy more of if the
prices were lower?
• Which items would you buy less of if the prices
were higher?
• For which items are there substitutes?
• Do any of your purchases have a complement?
Of Demand
Elasticity of Demand
The relationship between the
percentage change in quantity
demanded and the percentage
change in price.

Elasticity = “Responsiveness”
• How responsive is consumer demand to
changes in price?
3 Types
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Elastic Demand: Response to change
in demand is greater than the change in
price
Inelastic Demand: Response to
change in demand is less than the
change in price
Unit Elastic Demand: Response to
change in demand is equal to change
in price.
(expressed in percentages)
Elastic Demand
% change in Qd > % change in P
Example:Price goes up 10%
Quantity Demanded goes down 20%
% Δ Qd > % Δ P
Inelastic Demand
% change in Qd < % change in price
Example: Prices goes up 10%
Quantity demanded goes down 5%
% Δ Qd < % Δ P
Unit Elastic Demand
% change in Qd = % change in P
Example: Price goes up 10%
Demand goes down 10%
% Δ Qd = % Δ P
Factors that Determine Elasticity
Goods May Be More Elastic When:

Number of Substitutes
• If there are many substitutes, demand may be
more elastic

Luxuries v. Necessities
• Demand for luxuries is more elastic than
demand for necessities

% of Income Spent On the Good
• Demand is more elastic for goods that cost a
larger percentage of income

Time
• Demand is more elastic as time passes
So what?
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Elasticity of Demand Affects
TOTAL REVENUE
( SOMETHING BUSINESSES CARE VERY MUCH ABOUT)
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Read p. 80-84.
Copy the chart from page 84.
“Relationship of Elasticity of Demand to Total Revenue”
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Complete Ch3 Demand H/O
In your groups discuss the following and prepare
to report the group consensus:

Our national government has decided to
commit to a campaign to reduce smoking.
To achieve this goal, a proposed tax of
$3.00 will be added to each pack of
cigarettes.
• Do you think cigarettes are elastic, inelastic or
unit elastic?
• Based on your decision in #1, will a $3.00 tax
reduce the number of smokers in our society
by more than the price increase?
• Would you support or oppose this proposal?
Do you have other alternatives?