Transcript DEMAND ELASTICITY

DEMAND ELASTICITY
MARGINAL UTILITY
people want the most useful and
most satisfactory combination of
goods and services in spending
their income
 most utility
Marginal utility – the extra
usefulness or satisfaction a person
gets from acquiring one more unit
of a product
DIMINISHING MARGINAL
UTILITY
Consumers generally keep on
buying a product until they reach a
point where the last unit consumed
gives enough, and only enough,
satisfaction to justify the price
As you continue to buy something,
the marginal utility diminishes
 reflected in the downward sloping
demand curve
DIMINISHING MARGINAL
UTILITY
the first unit of a product will give you
the most marginal utility (lemonade), the
second will give you some marginal
utility but not as much as the first, and
so on.
you’ll continue to buy the lemonade until
the marginal utility received from the
additional glass does not justify its cost
ELASTICITY
Demand elasticity is the extent to which
changes in price cause changes in the
quantity demanded
Demand is elastic when a relatively small
change in price causes a relatively large
change in the quantity demanded - A
change in price leads to a larger change
in demand
 i.e. a sell for T-Bone steaks/digital
cameras can lead to a huge increase
in demand
DEMAND INELASTICITY
Demand is inelastic when a given
change in price causes a relatively
smaller change in the quantity
demanded- demand remains stable
regardless of a change in price
 Price of gasoline can skyrocket over $3
but we don’t see people stop
consuming large quantities of gasoline
3 DETERMINANTS OF
ELASTICITY
ARE ADEQUATE SUBSTITUTES
AVAILABLE?
CAN THE PURCHASE BE
DELAYED?
DOES THE PURCHASE USE A
LARGE PORTION OF MY
INCOME?
Are Substitutes Available?
If a product has many substitutes, the
demand for the good tends to be elastic
 T-bones and chicken
 Hollister vs. Abercrombie
If a product does NOT have substitutes,
the demand tends to be inelastic
 Medication
 Gasoline in General
 Milk
CAN PURCHASE BE
DELAYED?
If the purchase of a product can be
delayed, the demand for the good tends
to be elastic

T-bones, Digital Camera, Concert Tickets
If the purchase can NOT be delayed,
the demand for the good tends to be
elastic

Gasoline, Electric, Medical attention
Does Purchase Use Large Portion
of Income?
When the product requires a large
portion of income, demand for that
product tends to be elastic

Cars, Homes, Digital Cameras, I-Pods
When the product does NOT require a
large portion of income, demand for that
product tends to be inelastic

Mountain Dew, Bread, Coffee
What is Supply?
A schedule of quantities that would be
offered for sale at all possible prices
that could prevail in the market
Also deals with the ability and
willingness, this time of producers to
offer products for sale
Part of a suppliers decision making is to
decide how much to offer for sale at
various prices
 depends on the cost of producing the
goods or services
LAW OF SUPPLY
In general, the higher the price, the
greater quantity the seller will offer for
sale, the lower the price, the less they
will offer for sale
 As long as cost of oil continues to
increase, we will see an increase in the
amount of people who will want to sell
gasoline
Supply Schedule
A listing that shows the quantity
supplied at all prices that might
prevail in the market at a given time
 Price vs. Quantity Supplied
 Can graph in a supply curve
SUPPLY CURVE
A graphic depiction of the points
corresponding to a supply schedule
Also illustrates the quantity that
suppliers will supply at each and
every price
 upward sloping therefore displaying
the law of supply
Changes in Supply
A change in the quantity supplied is a
change in the quantity of the product
supplied in response to a change in
its price
 movement along the supply curve
This is different than a change in
supply
 movement of the entire curve
FACTORS CAUSING
CHANGE IN SUPPLY
Cost of inputs
Productivity
Technology
# of Sellers
Taxes and Subsidies
Expectations
Government Regulations