Transcript Chapter 4.3 notes - Effingham County Schools

Chapter 4.3 notes
Demand Elasticity
Demand Elasticity
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HOW MUCH a change in P causes a
change in Qd
Elastic – when a change in P causes a
relatively larger change in Qd. Ex: green
beans, corn, tomatoes, etc.
cont’d
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Inelastic – a change in P causes a
relatively smaller change in the quantity
demanded. Ex: table salt, gas
Unit Elastic – a given change in price
causes a proportional change in quantity
demanded.
Calculating Demand Elasticity
Demand Elasticity = %ΔQd
%ΔP
If the numerator is > denominator = elastic
If the denominator is > numerator = inelastic
Total Expenditures Test
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TE= P x Qd
If demand curve is elastic – when P down,
TE up. (inverse)
If the demand curve is inelastic – P down,
TE down and vice versa
If the demand curve is unit elastic – P down
OR up and NO change in TE
Total Expenditure
Price
When the price is $4, consumers
will demand 100 units, and spend
$400 on this good.
$4
P × Q = $400
(TE)
P
0
Demand
100
Q
Quantity
How TE Changes When Price Changes:
Inelastic Demand
Price
Price
… leads to an Increase in TE
from $100 to $240
An Increase in price from $1
to $3 …
$3
TE = $240
$1
Demand
TE = $100
0
100
Quantity
Demand
0
80
Quantity
How TE Changes When Price
Changes: Elastic Demand
Price
Price
… leads to an decrease in
TE from $200 to $100
An Increase in price from $4
to $5 …
$5
$4
Demand
Demand
TE = $200
0
TE = $100
50
Quantity
0
20
Quantity
Note that with each price increase, the Law of Demand still holds – an
increase in price leads to a decrease in the quantity demanded. It is the
change in TR that varies!
Determinants of D Elasticity
• Necessities vs. Luxuries – Necessities
usually inelastic
• Substitutes goods/services - If no sub,
usually inelastic
• Portion of income – if uses a large portion
of income, usually elastic
Rank the following items from most
elastic to least elastic
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Honda Accord
Beef
European vacation
Salt
Dijon mustard
steak
Results…?
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European Vacation
Honda Accord
Dijon mustard
Steak
Beef
salt