Elasticity of Demand, price ceilings, price floors

Because they lack a sufficient SUBSTITUTE!!!

Economists measure the reaction of consumers to changes in prices

This measurement is called….PRICE ELASTICITY OF DEMAND!!!!

Price Elasticity of Demand

Goods that lack a sufficient substitute are considered “inelastic”.

This means that consumers must purchase these goods/services, no matter how high their price increases

Inelastic Demand

This is what an inelastic good/service looks like when graphed…..

Graphing Inelastic Demand

In order for a good to be considered inelastic, it must have a “value” of < 1…..

Here are some examples of inelastic goods… Salt – 0.1 Matches – 0.1 Toothpicks – 0.1 Gasoline – 0.2 Coffee – 0.25 Tobacco products – 0.45 Automotive transportation – 0.2 Insulin – 0.1

Values of Inelastic goods/services

Goods that do have a sufficient substitute are considered “elastic”.

This means that if the price of an elastic good increases too much, then consumers will purchase a substitute good and be just as satisfied…

Elastic Demand

This is what an “elastic” good looks like when graphed….

Graphing Elastic Demand

In order for a good/service to be considered “elastic”, it must have a value > 1….some examples….

Private education – 1.1 Meals at a restaurant – 2.3 Ford cars – 4.0 Fresh Tomatoes – 4.6

Values of Elastic goods/services

Calculating Elasticity of Demand To calculate Elasticity…. [(Q2-Q1) / ((Q1+Q2) / 2 )] / [(P2-P1) /

((P1+P2) / 2] ….see board for clarification Q2 = QUANTITY DEMANDED AT NEW PRICE Q1 = QUANTITY DEMANDED AT ORIGINAL

PRICE P2 = NEW PRICE P1 = ORIGINAL PRICE

HONORS ONLY!

Calculate the price elasticity of these two goods….

#1 Insulin Q1 = 12 injections per week, Q2 = 14

injections per week, P1 = $20.00 per injection, P2 = $10.00 per injection

Elasticity = -.23 Always take the absolute value = .23

HONORS ONLY – practice!

Calculate the price elasticity of ORANGE JUICE

PREDICTIONS? INELASTIC OR ELASTIC? Q1 = 1 QUART PER WEEK Q2 = 3 QUARTS PER WEEK P1 = $2.50 P2 = $2.25 PRICE ELASTICITY = 9.52

HONORS ONLY – more practice!

Yes!!! If the government wants to establish a

minimum price for a good/service, it is called a price floor.

If the government wants to establish a maximum price for a good/service, it is called a price ceiling.

Can the government place limits on pricing?

Graphical viewPRICE CEILING

PRICE FLOOR

PRICE CEILINGS Always BELOW

equilibrium Enacted to create

shortages What does this mean? Keeps demand high Benefits consumers Producers lose money Ex. Rent controls for

apartments

PRICE FLOORS Always ABOVE

equilibrium Enacted to create

surpluses Benefits Producers Consumers lose –

have to pay higher prices

Ex. Agriculture

COMPARISON