Elasticity of Demand If the price of toothpaste

Elasticity of Demand

If the price of toothpaste goes up by $10, by HOW MUCH will you decrease your quantity demanded?

Elasticity Responsiveness of quantities demanded or supplied to changes in price

Elasticity of Demand Measure how responsive quantity demanded by a consumer is to change in price.

Equation Elasticity of demand = % change in Quantity Demanded % change in Price

Example. . . The price of Energizer batteries increases in price from $4. 00 per pack to $4. 20 per pack and the quantity demanded falls from 40 to 32. Find the Elasticity of Demand?

What does this number mean?

Coefficients Ed > 1 (Elastic) – price changes causes larger change in Quantity demanded. Ed = 1 (Unitary) – price changes cause equal change in quantity demanded. Ed < 1 (Inelastic) – price changes causes smaller change in quantity demanded.

Elastic

Unitary

Inelastic

Perfectly Elastic

Perfectly Inelastic

What factors might affect the elasticity of demand?

If the demand for a good is sensitive to price changes, it is called elastic. What are some items that would be sensitive to price change. i. e Paper clips, generic envelopes

Proportion of Income (P) Small Ticket item (cheap)(inelastic) vs. Big Ticket Items (elastic) (Expensive) i. e. Pack of gum vs. Car

Availability of Substitutes (A) More substitutes, more elastic Less substitutes, less elastic i. e. Energizer batteries

Nature of Item (N) Necessities (inelastic) vs. Luxury items (elastic) i. e. Soap vs. Luxury car

Time (T) More time, more elastic (adjust buying habits) i. e. Buy iphone 4 instead of iphone 5

Why is elasticity important for business people?

It determines whether total revenues RISE or FALL when prices changes.

Relationship to Revenue Total Revenue = Price x Quantity Demanded TR = P x Qd

Elasticity and Revenue A company needs to pay attention to what the demand curve is for their product. While a business may want to charge more their product, the price increase will lower the demand for it and may subsequently hurt their revenues. Thus, the company make more selling more at a lower price than less at a higher price.

Elasticity and Revenue Price per pizza slice Quantity demanded per day Total Revenue $0. 50 300 $150 $1. 00 250 $1. 50 200 $300 $2. 00 150 $300 $2. 50 100 $250 $3. 00 50 $150 What price should the pizzeria sell at?

Elasticity and Revenue Note that the more inelastic the demand is, the more that may be charged for it since people will still pay the higher price.

When demand is. . . Elastic – TR moves in opposite direction of price change Unitary – TR stays the same (change in P offset by change in Qd) Inelastic – TR moves in same direction as price changes