Transcript Lesson 2 elastic demand

Unit 2 – Lesson 2
Elasticity
 The term used by economists to describe how
consumers react to price changes.

For example, for many products, if the price
increases then demand drops.
Quantity Price per 100 g
demanded
in kg.
100
0.65
200
0.55
300
0.45
500
0.35


This is the term used to describe the
phenomenon of the increase in price does not
significantly decrease demand
In other words, people will continue to buy a
product regardless of the price fluctuation
Quantity
demanded in
Litres
250
Price per Litre
0.65
275
0.55
300
0.45
325
0.35


is there a close, cheaper substitute for the
product? If the answer is yes then the demand
will be elastic (i.e., will decrease as price
increases)
is the consumer unwilling or unable to stop
buying the product? If consumers can do without
the product then the demand will be elastic. A
product may be so popular (e.g., latest Harry
Potter book) that consumers will buy it at almost
any price. Other products, like gasoline, are
essential and consumers must buy it regardless
of price.



For producers the elasticity of demand for a
product is very important for them to know
when they are trying to decide on a price.
If a product has an inelastic demand, like
gasoline, then the higher the price, the more
money will be made.
For some products a higher price may mean
less money if the drop in demand results in
more money lost than is gained by the price
increase.



Inelasticity: if a price increase causes total
revenue (money being made by the seller) to
rise then demand is inelastic.
Elasticity: if a price increase causes total
revenue to drop then demand is elastic.
Unitary Elasticity: if a price increase results in
no change in total revenue then demand has
unitary elasticity.



When using these definitions it is important to
note that the elasticity of demand may change at
different price ranges.
For example: the demand for the latest video
game console may be inelastic up to a certain
price that most consumers can afford or feel is
not unreasonable. It is a popular product and
most consumers are willing to pay a high price
for it.
However, not many people would pay $15,000
for a new video game console. There will be a
price threshold past which the demand will
become elastic again. This would be a very useful
price for the seller to know.
Price per Cake
Quantity
Demanded in
‘000’s
Total Revenue
in ‘000’s
Elasticity of
Demand
1.80
60
108
Elastic from
1.60 to 1.80
1.60
70
112
Unitary
elasticity from
1.40 to 1.60
1.40
80
112
Inelastic from
1.20 to 1.40
1.20
90
108
Inelastic from
1.00 to 1.20
1.00
100
100



The chart shows that
from $1.00 to $1.40 the
total revenue goes up.
Therefore demand is
inelastic.
From $1.40 to $1.60 the
total revenue stays the
same. The drop in
demand has offset the
increase in price exactly.
Above $1.60 total
revenue drops. Therefore
demand is elastic.

Big businesses have marketing departments that may do
research to determine the elasticity of demand for their
product. For small businesses trial and error using small
price changes may be the approach used.
Elasticity of demand can apply to labour as well. Highly
skilled workers are able to demand higher wages because
there is no easy substitute for their skills.
Elasticity of demand is an important consideration for the
government when deciding excise taxes. The government
taxes products with inelastic demand (e.g., gasoline,
because the consumer is willing to pay the higher
price). The government also taxes items like alcohol and
tobacco, where they are not concerned with a drop in
demand.