ELASTICITY Price Increase I still buy need Price

ELASTICITY

Price Increase I still buy (need) Price Increase I will not buy (want)

Elasticity of Demand 1. List an item that you would buy less of if the price increased. 2. List an item that you would buy more of if the price decreased. 3. List an item that you would continue to buy, even if the increased.

Inelastic vs. Elastic Demand Curve

Elasticity of Demand –how consumers will cut back or increase their quantity demanded for a product when prices rise or fall Measures the extent to which changes in price causes changes in quantity demanded. Helps determine how much a price change will influence the qd of any given product

Elasticity of demand P P P 2 P 1 D 0 QD

Elastic Demand Elastic – consumption changes drastically when a price rises or falls A consumer is very responsive to price changes

Elastic Demand Curve P 115, 900 40, 000 10, 000 0 D 10 100 QD

Inelastic Demand Inelastic - changes in price causes a relatively small change in quantity demanded Consumers continue to purchase regardless of price change

Inelastic Demand Curve P $3. 00 1. 50 D 0 2 3 QD

Determinants of Demand Elasticity 1. Need vs. a Want • 2. Availability of Substitutes • 3. 4. Medicine versus a luxury automobile Pepsi/Coke, Butter/Margarine Importance of the Product • How much you spend on a good • Table salt versus designer clothes Time Horizon • Longer time horizon – more elastic • Gas in the short run is inelastic, but over time elastic

Elastic Products Inelastic Products

Item Elastic/Inelastic Insulin for a diabetic Inelastic Need/No Available Substitutes Elastic Want/ Available Substitutes Inelastic Need Elastic Want Inelastic Need Heinz 57 Tomato Sauce Food Polo Brand Clothing Cigarettes Determinant