Transcript Elasticity of Demand

Elasticity of Demand
Chapter 4
Section 3
• Elasticity of Demand – dictates how
drastically buyers will cut back or increase
their demand of a good when the price
rises or falls
– Inelastic – will continue to buy
– Elastic – buy less with a price increase
In Dollars
Elastic – Will buy less of, sensitive to
price changes
Quantity Demand
In Dollars
Inelastic – keep buying despite price change
Quantity Demanded
• Mountain Dew
– 1.50 increased to 2.00
– Still buy the same amount?
• Magazines
– 5.00 to 10.00
– Buy the same amount?
• Elastic Demand curve
– Price goes from 2.00 – 2.50
– Demand goes down by 1
Demand Curve
$3.50
$3.00
Axis Title
$2.50
$2.00
$1.50
$1.00
$0.50
$1
2
3
4
5
6
Factors
• If there are few substitutes then even
when prices rise you will still purchase the
good (inelastic)
– Life saving medicine
• Many substitutes will make a product
(elastic)
– Apples
• Necessity vs. luxury
– Varies person to person
– Milk for example (necessity)
• Many families purchase milk regardless of price
• Demand for milk is inelastic
– Steak (luxury)
• Families may cut back if steak jumps 50%
• Demand for milk is elastic
Demand over time
• Consumers do not always react quickly to
a change in price
– Takes time to find substitutes
• Inelastic
– Over time the demand becomes elastic
1970’s
• Oil crunch
– People had large vehicles
– Price of gasoline jumped
– Could not find substitutes
• Inelastic
– Over time people …
• Smaller cars, car pool, fuel efficient vehicles
• elastic
Total revenue and elastic
demand
• Total revenue – amount of money the
company receives by selling it’s goods
– (Price of the good)*(quantity sold)
Slices of Pizza
Quantity
Demanded
Total Revenue
.50
300
$150
1.00
250
$250
1.50
200
$300
2.00
150
$300
2.50
100
$250
3.00
50
$150
Total revenue and inelastic
demand
• Higher mark up in price will make up for
the lack of goods being sold
• If the company decreases the price they
will lose revenue
Slices of Pizza
Quantity
Demanded
Total Revenue
.50
300
$150
1.00
250
$250
1.50
200
$300
2.00
150
$300
2.50
100
$250
3.00
50
$150
Elastic Demand (apples)
As the price
is raised…
Total
revenue falls
Elastic Demand (apples)
Total revenue
rises
As the price
is lowered
Inelastic Demand (medicine)
As price is
lowered
Total
revenue falls
Inelastic Demand (medicine)
As prices are
raised
Total Revenue
rises