Transcript Supply and Demand II

Supply and Demand II
Lesson 12 – 5a & 5b
The Ripple Effect:
Price Elasticity:
Measurement of how sensitive consumers are to price
changes. Would the amount of Pizza’s you buy change a lot if
the price went up by $1?
Elasticity continued
• Elasticity refers to the responsiveness that a
Good or Service has to the change in a
different factor influencing that good or
service
• If that same pizza increased its price by $10
then how likely do you think it would be that
you would buy the same number of pizzas on
a regular basis? This sensitivity to change in
price is what elasticity refers to.
Price elasticity of Demand:
• If we increased the price of a pizza by 10%
• And due to that increase, if sales of that pizza
then dropped by 20%
• Then the elasticity of that pizza would be -2
• Economist don’t look at -/+’s so an elasticity of
2 represents a great deal of change.
• (However) if that same 10% increase in price
resulted in a 5% decrease in sales then the
elasticity would be ½ (.5) which is a low
number
= any number less then 1 means it is inelastic
Inelastic demand: quantity demanded by consumers remains the
same no matter what the price is.
Elastic Demand : quantity demanded changes, however price is
constant (think souvenir t-shirts)
Elastic:
• Demand is responsive to price changes
• Many substitutes to choose from
Inelastic:
• Price changes have little effect on demand for
a certain good.
• More price change
Unit Elastic:
• Unit elastic is the middle point or dividing line
between a good or service’s elasticity and
when it is inelastic. If a g or s is “unit elastic”
then the percent of change in price will be
exactly the same as the percent of change in
quantity demanded. (A price increase of 10%
will result in a quantity change of 10%)
Total Revenue:
Total Revenue Test:
• Why does stuff cost what it costs?
• TR=P*Q
• If purchases increase enough (elastic) after a price
drop then it’s all Good.
• If the price drops by 10% but the demand increases
by more than 10% the supplier wins.
• Demand is inelastic if there is a price drop but the
demand does not increase enough.
• If the change in quantity demanded is less than the
change in price, total revenue will decrease.
Income Elasticity of a Good:
• Measure of how responsive demand for a
good or service is when people who are
demanding that good have a change in their
income.
• Price stays the same but demand Goes up.
• Example: New clothing
• Most Goods are income elastic.
• What happens to the demand curve?
Price Elasticity of supply
• It’s a measure of how responsive producers
are to price changes.
• If producers react to rising or falling prices by
Greatly changing how much they produce,
then supply is elastic.
• More elastic in the long run than the short
run.
Price Elasticity of Supply:
• Rate of how responsive supply is in
accordance to a price change in a
good/service.