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Grab the handout off the front desk! Today’s LEQ: How do you measure a consumer’s responsiveness to a change in price? Measures how much buyers and sellers respond to changes in market conditions Measures how willing buyers are willing/able to change buying habits in response to a price change Makes discussion of demand quantitative: How does a change in price impact quantity demanded for a given good or service? For example, gas prices dropped to $3.00 per gallon – how much will this change consumer behavior? Demand for a g/s = elastic if QD changes substantially Demand for a g/s = inelastic if QD changes slightly Your classmates will drop each item to the ground from shoulder height. Which item is the most elastic/inelastic and why? Deflated Volleyball Kickball Phrase your answer in terms of price and quantity demanded. No universal rule on determining elasticity – too many social, economic, psychological factors that come into play A few general rules of thumb that can be helpful: Substitutability: more substitutes = more elastic; less substitutes = less elastic ▪ Definition of the Market: Broad markets mean less substitutes Proportion of Income Spent on Product: g/s that represent higher proportion of income = more elastic Luxury or Necessity? Can you go without it? More elastic Addictive? Habit forming? More inelastic Time Horizon: Short run = more inelastic; long run = more elastic Using your understanding of the determinants of demand elasticity, rank the following g/s in order of most elastic to least elastic. Be prepared to defend your placement. Insulin Cigarettes Running Shoes Granny Smith Apples BMW convertible Gas Take out your class notes! There are two ways… simple and complicated (we have to know both ways ) Simple way first: This will give you the elasticity coefficient – the change in QD proportionate to the change in price Use absolute value (eliminate (-) or (+) sign) For example, suppose a 10% increase in the price of an ice cream cone causes the amount of ice cream you buy to fall by 20%. Calculate the elasticity of demand using the simple formula. For example, suppose a 20% increase in the price of tacos causes the amount of tacos you buy to fall by 5%. Calculate the elasticity of demand using the simple formula. Calculate elasticity for two points on a demand curve, point A and point B. For the sake of plugging these points into the formula, point A = (Q1, P1) and point B = (Q2, P2). A: Price = $4 Qty = 120 B: Price = $6 Qty = 80 What happened to our snow day?! Take out your “Snicker Effect” activity and be ready to start when the bell rings. Did the market demand for Snickers seem to be elastic or inelastic? How do you know? Were the Snicker Bars an inferior good or normal good? How do you know? Which goods were complements or substitutes? How do you know? Add to your notes as you watch. You will be asked to revisit your brainstorming activity after the video. Be prepared! http://youtu.be/4oj_lnj6pXA