Download Intro to Elasticity of Demand

Elasticity of Demand
Chapter 5
Slope of Demand Curves
• All demand curves do not have the same slope
• Slope indicates responsiveness of buyers to a change in price
Which demand curve is most sensitive to price changes?
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ELASTICITY OF DEMAND
When price rises => Quantity Demanded falls
• Elasticity of demand (Ed) measures the sensitivity of quantity
demanded in response to a change in price:
Ed = % ∆ Qty D
%∆P
If Price ↑ 10% & Qty Demanded ↓ 15%, then Ed = ____
When Ed > 1 demand is sensitive to price changes (i.e. elastic demand)
3 Types of Demand Curves
• Elastic Demand
– Quantity demanded responds stronger than price change
– Example: If Price ↑ 25% => Quantity Demanded must ↓ by MORE than 25%
– Ed is > 1 (Ed = % ∆ Qty D/ %∆ P)
• Inelastic Demand
– Quantity demanded responds weaker than price changes
– Ed< 1
• Unit Elastic Demand
– Quantity demanded changes the same percentage as price changes
– Ed= 1 (i.e. If Price ↓10% => Quantity Demanded ↑10%)
Determinants of Elasticity of Demand
•
•
•
•
Number of Close Substitutes (what else can you buy)
Necessities vs. Luxuries (do you have to have it?)
Proportion of Income (is it expensive)
Time Horizon (when do you need it?)
Inelastic
Elastic
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Demand more elastic when:
• Larger # of substitutes
• Good is a luxury
• Larger proportion income
• Longer time period
Price Elastic or Price Inelastic?
Gasoline
Price Inelastic
Necessity &
No real substitutes
Soda
Price Elastic
Many substitutes
Heart Surgery
Table Salt
Price Inelastic
Price Inelastic
Necessity &
No real substitutes,
Short time period
Small proportion
of income, no good
substitute
Worksheet #1
• Lesson 4, Activity 18
•
2008 Economy
Stock Market worst year since 1937
– SP500 -40.0%
2009 Economy
• Stock Market- best year since 2003
– SP500 +23.0%
•
Unemployment rose 4.9% to 6.7%
• Unemployment rose 6.7% to 10.0%
•
GDP growth: 0.0%
Debt
=
Trillion
•10Fed
Funds Rate 5.25  0.25%
•
2010 Economy
Stock Market- good year
• GDP growth:
-2.6%
• Fed Funds Rate 0.25  0.00%
•
• SP500 +13.0%
2011 Economy
Stock Market- unchanged
• SP500 +0.0%
•
Unemployment fell from 10.0% to 9.8%
•
Unemployment fell from 9.8% to 8.6%
•
GDP growth
•
Debt
=
GDP
growth
•
+3.0%
Fed Funds Rate 0.00  0.00%
•
15.2 Trillion
+1.5%
Fed Funds Rate 0.00  0.00%