Elasticity of Demand Mr Lindquist AP Microeconomics Objectives

Elasticity of Demand Mr. Lindquist – AP Microeconomics

Objectives Today I can: • Identify elasticity of demand • Differentiate products that are ELASTIC or INELASTIC • Apply Midpoint Method to scenarios

Bellringer • Would you respond more strongly to a 10% increase in the price of gasoline or a 10% increase in the price of hamburgers?

Elasticity • Measure of responsiveness that shows how one variable responds to another variable. • How much QUANTITY DEMANDED moves when price is raised or lowered.

Elastic Goods If Price GOES UP just a little, then people will demand WAY LESS. • A change in price has a LARGE EFFECT on Quantity Demanded. • Relatively Responsive to price changes

ELASTIC GOODS GRAPH FLAT SLOPE!!!

ELASTIC GOODS ARE… • LUXURY Items (Take a large portion of income) – Jewelry – Sports Cars • Have Many available Substitutes – Coffee – CDs • Purchases can be delayed (WANTS) – New Furniture – Fresh haircut

INELASTIC GOODS • Quantity Demanded Changes VERY LITTLE with changes in PRICE. – FRUSTRATING FOR CONSUMERS – Change in price causes a small change in QD • Relatively unresponsive to price changes

INELASTIC GRAPH STEEP!!!

INELASTIC GOODS ARE… • HAVE VERY FEW SUBSTITUTES and typically are NECESSITIES – Food – Gasoline • Purchase CANNOT Be DELAYED – Healthcare – Brain surgery • Relatively small portion of income – Gum Ball

Substitutes for GASOLINE? • You have to drive… VERY FEW SUBSTITUTES – Electric Car: Tesla Motors (ALL ELECTRIC CAR) – Ride a Bicycle? INELASTIC!!!!

PERFECTLY INELASTIC EXAMPLE: • Brain Surgery – Life and Death. – Does it matter if it is $10 or $500, 000? – NO! You’ll find a way to get the funds

UNIT ELASTICITY Proportional Change: SAME Change in QD as Change in Price

DETERMINANTS OF DEMAND 3 QUESTIONS TO CONSIDER: 1. Can the purchase be delayed? – If YES: Elastic If NO: Inelastic 2. Are Adequate Substitutes available? – If YES: ELASTIC If NO: Inelastic 3. Does the purchase use a large portion of INCOME? – If YES (Large): Elastic If NO (Small): Inelastic

Elasticity of Demand Day 2 AP Microeconomics STUDENTS CAN: • Explain the Midpoint method in calculating the Elasticity Coefficient • Practice applying elasticity concepts • Read Section 9 Module 47 (Pages 467 -474) – Outline – Answer the “Check for Understanding” AND “Multiple Choice” section at the end.

Price Elasticity of Demand MEMORIZE THIS! • Percent change in quantity demanded divided by the percent change in price that caused demanded. Elasticity Coefficient

How do you figure out the percentages?

Demand for Vaccinations Section 9 | Module 46

Calculating the Price Elasticity of Demand ABSOLUTE VALUE Section 9 | Module 46

Using the Midpoint Method • The midpoint method is a technique for calculating the percent change. • In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values. Section 9 | Module 46

The Midpoint Method Section 9 | Module 46

Another Example • Lets try and figure out the demand for snickers bars (Snack Size) – When Price =. 30 – When Price =. 20 Quantity = 11 Quantity = 20 Change in price = -. 10 Change in Quantity = 9 Price (base) =. 25 Quantity (base) = 15. 5 % Change in Price = 40% % Change in Quantity = 58%

So Elasticity of snicker bars is = 58 / 40 = 1. 45

Interpreting the Price Elasticity of Demand • Demand is ELASTIC if the price elasticity of demand is greater than 1. • Demand is INELASTIC if the price elasticity of demand is less than 1. • Demand is UNIT-ELASTIC if the price elasticity of demand is exactly 1. • PEof. D = (% Change in Quantity Demanded)/(% Change in Price)

Summary 1. Elasticity is a general measure of responsiveness that can be used to answer such questions. 2. The price elasticity of demand—the percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)—is a measure of the responsiveness of the quantity demanded to changes in the price. • QUANTITY IS ALWAYS ON TOP OF FRACTION Section 9 | Module 46