Transcript S&D #5 - Cloudfront.net

S&D
Demand Elasticity
1. If the price of shoes
goes up, demand for
shoes will go up.
2. You will begin to
experience diminishing
marginal utility on your
3rd scoop of ice cream.
3. Pepsi & Coke are
complimentary goods.
*True or False?*
Elastic
• Price of product is elastic if
there are dramatic changes
in demand w/different prices
– Name a product that you’d
STOP buying if the price
doubled.
• Inelastic: not dramatic
changes w/ different prices
– Name a product that you’d
STILL buy if the price doubled.
Determining Elasticity:
% change in quantity
% change in price
If the elasticity is greater than 1.0
= elastic
If the elasticity is between zero
and 1.0 = INelastic
What makes something elastic?
1. Substitutes: more
substitutes, more elastic in
price
•
•
If Tylenol doubles in price,
what will consumers do?
If gas doubles in price, what
will consumers do?
2. Share of consumer’s budget
• If toilet paper doubles in price, what
will most consumers do?
– TP is a relatively small portion of income
(also, no substitutes)
• If cigarettes double in price, what will
most smokers do?
– Those addicted, will continue BUT new
smokers (teens) may never start b/c it’s a
large chunk of their income
3. Time
• Given time, new sub’s will be
created
– Oil prices rise, w/time new
technology will sub for gas
• EX hybrids, electrics, etc.
• In short run – gas is
inelastic & in long run more
elastic w/ more subs
Are tires elastic OR
inelastic? Why?
Tires are
• Short term inelastic
• Price changes probably have little effect
on demand in the short term.
• This refers to the slope of the demand
curve.
Oil
• Oil is inelastic because it is extremely useful.
• Pointing out how hard/costly not using oil is goes
against global warming action.
• Oil has saved millions of lives
Think about:
-medical technology
- Hans Rosling’s talks on:
200 years, 200 countries
The Washing Machine
Price Elasticity of Demand
• Answer the following questions using
the info on Table 5:
– List 2 items that are the most elastic.
Why might those items be so elastic?
– List 2 items that are the least elastic.
Why might those items be so
INelastic?