Microecon – Unit 2 Part 3

You have a group of average consumers.

Let’s say they all have a favorite gum…which normally costs

50¢.Would most of these consumers still buy the gum if the price rose to 75¢?

Same group of consumers.

Some years they go on their favorite vacation with their wives…...which normally costs

$1,000.Would most of these consumers still go if the price rose to $1500?

50¢ to 75¢

$1,000 to $1,500

What’s the percentage change in the price for the gum?

What’s the percentage change in the price for the vacation?

Economists examine this idea….

How will the demand for an item/service change when the price is changed?

If the price goes up…

will consumers buy less or none at all?

will consumers buy the same amount?

This is called….

Elasticity examines….will the quantity consumed change if the price goes up…or if the price goes down?

Elasticity is the responsiveness of one variable to changes in another variable, ceteris parabis (other things equal).

If the quantity demanded changes we call the demand elastic.

If the quantity demanded does not change we call the demand inelastic.P P

Q Q10 m

$1

$2

$3

D

$300

100

$200

200

$100

500

D

INELASTIC ELASTIC

There are characteristics of goods/services that can make their demand tend to be more elastic or more inelastic.

Use your intuition to decide if each makes the demand more elastic or inelastic.

Copy this chart into your notes.

Elastic Inelastic1

. 2.

3.

4.

5.

6.

Elastic Inelastic

many substitutes

Will a change in the price of Dasani bottled water make a difference in the quantity demanded?

few substitutes

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

6.

Elastic Inelastic

luxury

Will a change in the price of insulin make a difference in the quantity demanded?

necessity

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

6.

Elastic Inelastic

inexpensive

Will a change in the price of pens make a difference in the quantity demanded?

expensive

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

6.

Elastic Inelastic

non-habit forming

Will a change in the price of coffee make a difference in the quantity demanded?

habit-forming

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

non-habit forming

habit-forming

6.

Elastic Inelasticshorter time

period

Let’s say your refrig broke…would a change in the price of refrigs make a difference in the quantity demanded?

longer time period

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

non-habit forming

habit-forming

longer time period

shorter time period

6.

In addition to characteristics of products that tend to make demand for them be more elastic or inelastic…There is also the Total Revenue Test which will tell you if demand is elastic or inelastic.

Total Revenue =

quantity

price x

Let’s say there’s only one nail salon…

in town where you could adorn your nails with this lovely design…

..or the very popular French nail manicure…

                           

Let’s say the nail salon changed the price of its manicures and found the following:

price

quantity$10

$15

$30

15

To apply the total revenue test, we see what happened to TR when P .

5

1

So what is total revenue?

Total Revenue =

price

quantity$10

$15

$30

15

5

1

With manicures, when the price went up the TR went down. So was the demand for manicures elastic (responsive) or inelastic?

x

$150

$30

$75

Total revenue test Total revenue testP , TR P , TR

P , TR P , TR

Elastic Inelasticmany

substitutesfew substitutes

1. 2.

3.

4.

5.

necessityluxury

inexpensiveexpensive

non-habit forming

habit-forming

longer time period

shorter time period6.

Give 2 or 3 reasons to explain why demand for these products / services is more elastic or inelastic.

P

Q10 20 50

D enchiladas$2.50

$12.50

$7.50

$5.00

$10.00

$15.00

4030

So why does it matter if demand is more elastic or more inelastic?

D coffee

S

Which demand is relatively more inelastic?

enchiladas & coffee

P

Q10 20 50

D enchiladas$2.50

$12.50

$7.50

$5.00

$10.00

$15.00

4030

at P = $7.50 how many cups of coffee are demanded? how many enchiladas?

D coffee

S

enchiladas & coffee

Let’s say the gov’t imposed a tax on pound of coffee sold by mfg’s to stores & on every enchilada sold from distributors to restaurants. What shifts?

S1

P

Q10 20 50

D enchiladas$2.50

$12.50

$7.50

$5.00

$10.00

$15.00

4030

D coffee

S

enchiladas & coffee

Enchiladas P = ______ & Q = _______

Coffee P = ______ & Q = _______

S1

$10.00

20

$11.00

28

P

Q10 20 50

D enchiladas$2.50

$12.50

$7.50

$5.00

$10.00

$15.00

4030

D coffee

S

enchiladas & coffee

Enchiladas P = ______ & Q = _______

Coffee P = ______ & Q = _______

S1

$10.00

20

$11.00

28

Because the demand for coffee is more _________, coffee makers are able to pass more of the _____ on to consumers.

inelastic

tax