Elasticity Presentation Types of Demand Elasticity responsiveness to

Elasticity Presentation

Types of Demand • Elasticity: responsiveness to price changes. • Elastic Demand • Inelastic Demand

Elastic Demand Occurs When: • • Highly Responsive to price change The product is not a necessity Many available substitutes Demand curve has flat slope.

Consider the % change in qty D vs % change in price. $15 200 $10 = 33% 500 = 150%

Elastic Demand

Inelastic Demand • Price change has little impact on the quantity demanded. – Price goes up but we still buy it.

Inelastic Demand • The product IS a necessity • Very few substitutes available • Steep demand curve

Consider the % change in qty D vs % change in price. $2. 75 30000 $1. 00 = 63% 40000= 33%

Inelastic Demand

Elasticity of Demand - Demand is perfectly inelastic if there is a % change in P and NO change in Q D. Good is an absolute necessity. $ D QTY

Elasticity % Changes - If % change in QD > % change in P then D is elastic. - If % change in P > % change in QD then D is inelastic.

One Way To Determine True Elasticity: - Use the total revenue test - Total Revenue: All money that is generated from sale of goods/services. - Price x Quantity

Total Revenue Test - Demand is elastic if a decrease in P and increase in the TR (Total Revenue) (Inverse relationship) - Demand will be INELASTIC if a INCREASE in P = a INCREASE in TR. (direct relationship)

Elasticity - Even on a single demand curve, there are different levels of elasticity.

$ 600 D 750, 000 3. 32 1, 100, 000 1. 09 1, 125, 000 0. 4 500 900, 000 . 09 500, 000 400 300 200 1500 2750 3750 4500 5000

Price Elasticity Formula • % change in QD % change in price = Price elasticity coefficient.

Elasticity Coefficients • Using price elasticity formula, if your answer is: –. 99 or less, product has inelastic demand • The Smaller the #, the more inelastic. – 1. 01 or greater, product has elastic demand • The Larger the #, the more elastic. – 1. 00 product is unit elastic

Price Elasticity Formula Pizza Example • % change in QD % change in price 150% 33% = Price elasticity coefficient. = 4. 55

Price Elasticity Formula Soap Example • % change in QD % change in price 33% 63% = Price elasticity coefficient. =. 52