Transcript Elasticity of Demand

“We have this Powerpoint because I am easily
confused.” -- Coach D
ELASTICITY OF
DEMAND
Elasticity
 Demand is ELASTIC if the QD changes by a
relatively large amount due to a change in
price.
 The STRETCH comes from consumers NOT
following a product as its price increases or
decreases. The 2 numbers get farther apart.
 This is when consumers start thinking about
substituting a similar product.
 Horizontal (flat) graph.
Inelasticity
 This is when QD is not affected, to great
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degree, by a change in price.
Consumers continue to buy a product even
when the price increases/decreases.
The demand stays close, after a price change,
to what it was before the change.
Inelastic demand requires a much larger price
change to show a disruption in demand.
Vertical (steep) graph.
Necessities
vs. Luxuries
 Goods that people can’t live
without have INELASTIC demand.
 Demand is tied to the product, no
matter what the price.
 Ex: Medications, the first few
units of Food, Water, and Shelter.
Others??
Necessities
vs.
Luxuries
 Goods that people can do without are called
“Luxuries” and have ELASTIC demand.
 These goods can be given up, so when prices
rise demand changes by a significant
percentage.
 If the price to travel to Florida is too high,
people will stay home.
 Ex: Newest electronic devices, vacations, a
second car, and lake house. Others??
Availability of Substitutes
 The more substitutes that are available the
more ELASTIC demand will be for a specific
product.
 Oranges are a close substitute for tangerines.
It the price for tangerines rises, consumers
can easily substitute oranges.
 Some products have Perfect Substitutes
(carpet pads).
 No substitute means either pay more or go
without. (Inelastic= shoes, computers, light
bulbs)
% Income Spent on the Good
 Demand for goods that are inexpensive or
purchased infrequently is inelastic (not
very noticeable or expensive).
 Goods that are purchased frequently
(cereal, cheese, shampoo) or goods that
are more expensive (appliances, autos,
houses) have a more elastic demand,
because a price increase is more
noticeable (small %= much more $)
Who Pays the Bill
 Elasticity is smaller (more Inelastic) when
someone else is paying. It doesn’t matter to
you (Dinner with parents).
 You have no response to the price of a
product if you aren’t the one paying.
 If you have insurance for Dr. visits, then, if the
cost of a visit goes up, it won’t make you go
less often because you don’t pay more.
Elastic or Inelastic
 Good is a necessity: open heart surgery
 Good is a luxury: Cashmere sweater
 Few close substitutes: Drinking water
 Many close subs: Dasani brand water
 Small cost/ % income: Bubble gum
 Larger cost/ % income: Yacht (Big Boat)
 Someone else pays: health insurance
 You pay: backpack