Elasticity of Demand Chapter 5 Slope of Demand

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Elasticity of Demand Chapter 5

Elasticity of Demand Chapter 5

Slope of Demand Curves • All demand curves do not have the same slope

Slope of Demand Curves • All demand curves do not have the same slope • Slope indicates responsiveness of buyers to a change in price Which demand curve is most sensitive to price changes? D 1 Price 10% D 1 => Qty Demanded must fall, but by what percent?

PRICE ELASTICITY OF DEMAND • The change in quantity demanded in response to a

PRICE ELASTICITY OF DEMAND • The change in quantity demanded in response to a change in price Ed = % ∆ Qty D %∆P If Price ↑ 10% & Qty Demanded ↓ 15%, then Ed = ____ Ed > 1 is sensitive to price changes (elastic) Ed < 1 is not sensitive to price changes (inelastic)

3 Types of Demand • Elastic Demand – Quantity demanded responds strongly to price

3 Types of Demand • Elastic Demand – Quantity demanded responds strongly to price changes – Ed is > than 1 (Ed = % ∆ Qty D/ %∆ P) • Inelastic Demand – Quantity demanded does not respond strongly to price changes – Ed< than 1 • Unit Elastic Demand – Quantity demanded changes the same percentage as price changes – Ed = 1

Determinants of Elasticity of Demand • • Number of Close Substitutes Necessities vs. Luxuries

Determinants of Elasticity of Demand • • Number of Close Substitutes Necessities vs. Luxuries Proportion of Income (is it expensive) Time Horizon (when do you need it? ) Inelastic D 1 Elastic D 1

Demand is more elastic when: • • the larger the number of close substitutes

Demand is more elastic when: • • the larger the number of close substitutes if the good is a luxury Good is a larger % of budget the longer the time period Elastic D 1

Price Elastic or Price Inelastic? Gasoline Price Inelastic Necessity & No real substitutes Heart

Price Elastic or Price Inelastic? Gasoline Price Inelastic Necessity & No real substitutes Heart Surgery Price Inelastic Necessity & No real substitutes, Short time period Soda Price Elastic Many substitutes Table Salt Price Inelastic Small proportion of income, no good substitute

Worksheet #1 • Lesson 4, Activity 18

Worksheet #1 • Lesson 4, Activity 18

Debt = 10 Trillion • 2010 Economy Stock Market- good year • • SP

Debt = 10 Trillion • 2010 Economy Stock Market- good year • • SP 500 +13. 0% 2011 Economy Stock Market- unchanged • SP 500 +0. 0% • Unemployment fell from 10. 0% to 9. 8% • Unemployment fell from 9. 8% to 8. 6% • GDP growth • Debt = GDP growth • Fed Funds Rate 0. 00% +3. 0% • 15. 2 Trillion +1. 5% Fed Funds Rate 0. 00%