Elasticity of Demand describes the percentage change in quantity demanded that follows a price change Elasticity of Demand Demand is Elastic Demand is Inelastic Change in Price Large Change in ID: 579362
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Price Elasticity of Demand
Elasticity of Demand describes the percentage change in quantity demanded that follows a price change.Slide2
Elasticity of Demand
Demand is Elastic
Demand is
Inelastic
Change in Price
Large Change in
Qd
Change in Price
Small/No Change in
QdSlide3
Example: Dentist Visits
If the price increases, how much change will there be in the Quantity Demanded? Elastic or Inelastic?Slide4
Example: Sailboats
Elastic or Inelastic?Slide5
Key Factor - Preferences
Decides whether something is a necessity or a luxury.************************************************Make a list of goods and services and divide them up into the two categories of Elastic and Inelastic demand.…Can you come up with any more broader categories…such as Necessities (
vs
) Luxuries?Slide6
Determinants of Elasticity
Necessities (vs) LuxuriesNecessities tend to have inelastic demand and luxuries tend to have elastic demand
Substitution possibilities
Price elasticity of demand will be relatively high if it is easy to substitute between
products
Budget ShareItems that take up a larger share of the budget tend to have higher price elasticities of demandTimeBecause substitution often takes time, price elasticity will usually be higher in the long run than in the short runDurability of GoodsComputers, cars, washers, and dryers will be in greater demand if the price drops.DrugsLegal (heart medicine antibiotics) or illegal (heroin, cocaine)Slide7
Calculating Elasticity of Demand
Price elasticity of demand is defined as:the percentage change in the quantity of a good demanded resulting from a one-percent change in its price= % change in quantity demanded / % change in price= (ΔQ/Q)/(ΔP/P)
Price Elasticity = (P/Q)*(1/slope)Slide8
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
8 Copyright © 2005 McGraw-Hill Ryerson LimitedEquation for a Straight Line Demand Curve
P is for the price of the good
Q is for the quantity demanded
b is the vertical intercept
m represents the slopeSlide9
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
9 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.6 The Market Demand Curve for Canned TunaSlide10
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
10 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.12 Graphical Interpretation of Price Elasticity of Demand
Price elasticity of demand at any point along a straight-line demand curve is the ratio of price to quantity at that point times the reciprocal of the slope of the demand curve.Slide11
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
11 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.11 Elastic and Inelastic Demand
Three Cases!Slide12
Examples.
1) Find slope given price, quantity and y-intercept.Then calculate price elasticity of demand.Determine unit elastic, elastic, inelastic?2) Using a graph, be able to do the same thing.Slide13
Special Cases.
Perfectly Elastic demandPrice elasticity of demand is infinite(ΔQ/Q)/(ΔP/P) = ∞
Slightest change in price leads consumers to find substitutes.
Horizontal demand curve
Ex: - Foreign currency market
Perfectly Inelastic demand
Price elasticity of demand is zero
(ΔQ/Q)/(Δ
P/P) = 0Consumers do not switch to substitutes even when price increases dramatically
Vertical demand curveEx: - Diabetic (insulin) - Addict (heroin)Slide14
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
14 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.14Perfectly Elastic, Perfectly Inelastic, and Unit Elastic Demand Curves
Demand Curves The horizontal demand curve in panel (a) is perfectly elastic, or infinitely elastic, at every point. Even the slightest increase in price leads consumers to desert the product in favour of substitutes. The vertical demand curve in panel (b) is perfectly inelastic at every point. Consumers do not, or cannot, switch to substitutes even in the face of large increases in price. The demand curve in panel (c) represents a case of unit elastic demand. Regardless of the price selected, total expenditure is unchanged. In this example, total expenditure is $28 no matter what price is selected.Slide15
Elasticity of Supply
Can be elastic or inelastic depending on the product and circumstances.“responsiveness of producers to price changes in their products”Key FactorsTimeInelastic – short run, elastic – long run
Perishability
Goods stored easily – More elastic
Ex: Raspberries (Perish very quickly)…no matter what the price, suppliers will not want to carry large amounts.Slide16
Practice!!!
1) Determining whether things will have an inelastic or elastic demand.2) Calculating price elasticity of demand....assignment!Slide17
Expenditure & Revenue
Total Expenditure = Total Revenue (Consumers) (Producers)Total Expenditure = (Number of Units bought) (Price) = TRSlide18
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
18 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.10 Total Expenditure as a Function of Price
For a good whose demand curve is a straight line
, total expenditure reaches a maximum at the price corresponding to the midpoint of the demand curve.Slide19
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
19 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.7The Demand Curve for Movie Tickets
An increase in price from $2 to $4 per ticket increases total expenditure on tickets.
0
1
2
3
4
5
6
2
4
6
8
10
12
D
Quantity (100s of tickets/day)
Price ($/ticket)
An increase in price from $2 to $4 per ticket increases total expenditure on
ticketsSlide20
Law of Demand & Total Expenditures
Many firms would like to know: “Will consumers spend more on my product (will I get more revenue, in total) if I sell more units at a lower price or fewer units at a higher price?”
Answer depends on the price elasticity of demand
When
price rises, total expenditure may
IncreaseDecreaseOr stay the sameSlide21
Price Elasticity and Expenditures
For a product whose demand is “price elastic”Quantity demanded is highly responsive to price changesPercentage change in quantity dominates
An increase in price will reduce total expenditure
A decrease in price will increase total expenditure
For a product whose demand is
“price inelastic”Quantity demanded is not responsive to price changesPercentage change in price dominatesAn increase in price will increase total expenditureA decrease in price will decrease total expenditureSlide22
Example
Tickets at a Blue Jays game. P X Q = TR
Old Price
$ 40 X 33,781 = $1,354,840
New Price $ 50 X 25,000 = $ 1,250,000Demand is Elastic. Price results in TR …The price resulted in a big change of attendance at the game. (Obviously, there could be other factors as well…different teams in town)Slide23
Principles of Microeconomics, 2nd Canadian Edition Slide 1-
23 Copyright © 2005 McGraw-Hill Ryerson LimitedFIGURE 4.10
Total Expenditure as a Function of Price
For a good whose demand curve is a straight line
, total expenditure reaches a maximum at the price corresponding to the midpoint of the demand curve.
Elastic side
Inelastic sideSlide24
Elasticity of Demand – Important for businesses to consider…
What happens if a florist increases the price of roses 400 % in October ? Will sales go up or down ?A. Probably, down What happens if a florist increases the price of roses on February 14
th
? Will sales go down or up?
A. Probably up
- Why? Frantic husbands and boyfriends will pay exorbitant prices for a dozen roses on Valentine’s Day – if they know what’s good for them ! ! Slide25
Practice!!!
1) Calculating Total Revenue/Total Expenditures using a graph.2) Given a change in price, calculate the change in TR/TE, then determine whether the price elasticity of demand is Elastic, Inelastic, or Unit Elastic.