ECON01-MAR-10

• OBJECTIVE: To understand the concept of Elasticity and In-Elastic

• Notes on Elasticity• Video on Elasticity• Complete Worksheet on Elasticity

ELASTICITY

NOTES

ELASTICITY• the relative change in an economic

variable, e.g. demand, that occurs in reaction to changes in other variables, e.g. price or advertising input

INELASTIC• if the quantity responses to a change in

price are relatively small compared to change in price.

• Very few substitutes

Substitutes

• Competing products that can be used in place of one another; products related in such a way that an increase in price of one increases the demand for the other.

EXAMPLES—cost $4-$5 Pack

Personal financial impact

• The cost of a pack of cigarettes averages around $4.50 to $5, including taxes, depending on where you live. Using the lower number, a pack-a-day smoker burns through about $31.50 per week, or $1,638 per year. That's a fat house payment or a nice vacation with the family. A 40-year-old who quits smoking and puts the savings into a 401(k) earning 9% a year would have nearly $250,000 by age 70.

Gasoline—How much would you Pay?

ELECTRICITY

INSULIN---How much would you pay if you are sick?

ELASTIC GOODS• If the quantity responses are relatively

large, demand is described as elastic.

• Many substitutes

EXAMPLES OF ELASTIC GOODS

PORK CHOPS-----

CARS

                              

VACATIONS

DEMAND-----• is typically more elastic in the long run

than in the short run.