Download Elastic Inelastic

Macroecon – Unit 1
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
50¢ to 75¢
What’s the percentage
change in the price for the
gum?
$1,000 to
$1,500
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 the
same amount?
….will consumers buy less or
none at all?
This is called….
Elasticity is the responsiveness of
one variable to changes in another
variable, ceteris parabis (other
things equal).
Elasticity examines….will the quantity
consumed change if the price goes
up…or if the price goes down?
If the quantity
demanded does not
change we call the
demand inelastic.
P
If the quantity
demanded changes
we call the demand
elastic.
INELASTIC
P
ELASTIC
$300
$3
$2
$200
$1
$100
D
10 m
Q
D
100 200
500 Q
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
1.
2.
3.
4.
5.
6.
Inelasti
c
Elastic
Inelasti
c
few substitutes
many
substitutes
Will a change in the price of Dansani
bottled water make a difference in
the quantity demanded?
Elastic
1. many
substitutes
2.
3.
4.
5.
6.
Inelasti
c
few
substitutes
Elastic
necessity
luxury
Inelasti
c
Will a change in the price of insulin
make a difference in the quantity
demanded?
Elastic
1. many
substitutes
2. luxury
3.
4.
5.
6.
Inelasti
c
few
substitutes
necessity
Elastic
expensive
Inelasti
c
inexpensive
Will a change in the price of pens
make a difference in the quantity
demanded?
Elastic
1. many
substitutes
2. luxury
3. expensive
4.
5.
6.
Inelasti
c
few
substitutes
necessity
inexpensive
Elastic
Inelasti
c
habit-forming
non-habit
forming
Will a change in the price of
cigarettes make a difference in the
quantity demanded?
Elastic
1. many
substitutes
2. luxury
Inelasti
c
few
substitutes
necessity
3. expensive
inexpensive
4. non-habit
forming
5.
habit-forming
6.
Elastic
Inelasti
c
longer time period
shorter time period
Let’s say your refrig broke…would a
change in the price of refrigs make a
difference in the quantity
Elastic
1. many
substitutes
2. luxury
Inelasti
c
few
substitutes
necessity
3. expensive
inexpensive
4. non-habit
forming
5. longer time
habit-forming
6.
period
shorter time
period
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 = price x quantity
Let’s say there’s only one local tatoo
parlor
where you could
adorn your body
with this lovely
design…
…or even a
tatoo for
kitty!
Let’s say the tatoo parlor changed the
price of its tatoos and found the
following:
pric
quantity
e
$100
15
$150
$300
5
1
To apply the total revenue test, we
see what happened to TR when P .
So what is total revenue?
Total Revenue = pric x quantity
e
$100
15
$1500
$450
$150
5
$300
$300
1
With tatoos, when the price went up
the TR went down. So was the
demand for tatoos elastic
(responsive) or inelastic?
Elastic
1. many
substitutes
2. luxury
3. expensive
Inelasti
c
few
substitutes
necessity
inexpensive
habit-forming
4. non-habit
forming
5. longer time period shorter time
period
Total
revenue
test
Total revenue t
6.
P , TR 
P , TR 
P , TR 
P , TR 
Give 2 or 3 reasons to explain
why demand for these
products/services is more
elastic or inelastic.
continue with overheads from AP
guide
10 min
calculate arc elasticity coefficient
AP Macroecon workbook p. 38 in small
groups
40 min
the
end