Download Elasticity of Demand Notes

Ice-Cream:
If you were planning to have a pizza for dinner and saw
a sign in your favorite pizza restaurant that read, 'Due
to increases in the cost of cheese - all items on the
menu (including drinks and salad) have been increased
by $1.00 until further notice, would you still go in and
order pizza for dinner? Why?
Suppose you notice the fuel indicator on your car
pointing to 'Empty.' As you pull into the gas station, you
see the price of gasoline has risen by $1.00 per gallon.
Do you still get gas? Why?
Chivalry or Practicality? That is the question…
Why PRICE ELASTICITY matters in modern knightliness
What is the Law of Demand again??
-Consumers will buy more of a good when its price
decreases and less of a good when price increases.
If this holds true, why is it that there seem to be some
goods that people will still buy even as price increases?
-The answer lies in the concept of the Elasticity of Demand.
Price Elasticity of Demand: (Write this down.)
- a measure of how consumers react to a change in price.
***basically, when the price of a good changes, how does it affect
how much we buy of that good.
-Think of the previous example, why would we probably still be willing to buy
gas for $30.00 more and NOT pizza for $3.00 more?
- because these items have different price elasticities.
So, all you ballers and ballerettes… What
influences the Price Elasticity of Demand???
1.) The availability of substitutes:
- When there are few substitutes for a good, then even when its
price rises greatly, you might still buy it because it is inelastic.
= ELASTIC (many choices of
types of food)
= INELASTIC (few choices
for types of fuel)
2.) Relative Importance (degree of desire):
-Amount of your budget that you spend on that type of item.
-The more money you spend on an item, the more it becomes elastic
as its price changes.
-***Use clothes as an example
3.) Necessities vs. Luxuries:
-Necessities tend to be more inelastic and luxuries tend to be more
elastic.
= elastic
= inelastic
=?
4.) Change over time
- Initially (in the short run), many items are inelastic but over time
(in the long run) almost all things are elastic because you can find
substitutes.
INELASTIC
ELASTIC
(gasoline)
(e-85 and hydrogen)
So, now that we understand Price Elasticity of Demand, how can we figure
it out for a specific product?
1.) When Ed = less than |1|, the item is inelastic
- Basically, that a large change in price will not affect
quantity purchased very much.
2.) When Ed = |1|, the item is unitary elastic
- Basically, the percentage change in quantity demanded is
exactly equal to the percentage change in price.
3.) When Ed = greater than |1|, the item is elastic
- Basically, that a large change in price will greatly affect
the quantity purchased.
The Equation to Calculate Ed is:
Ed =
Qn – Qo
Pn – Po
(Qn + Qo)/2
Pn = New Price
Po = Old Price
Ex.
(Pn + Po)/2
P
$4 $3 $2 $1
Q
2
5
9
14
Qn = New Quantity
Qo = Old Quantity
Ed =
9-5
2–3
(9 + 5)/2
(2 + 3)/2
4
-1
7
2.5
= 1.42857
The item is ELASTIC
Item is Elastic,
Item is Inelastic,
- A small change in price
causes a huge change in
quantity purchased
- A large change in price
only causes a small
change in quantity
purchased
So gentleman, the next time your date accuses
you of being cheap, explain the Price Elasticity
of Demand to them (its not as nerdy as you
think) and why chivalry isn’t dead…its just
more of an elastic concept and that
sometimes fast food can be just as romantic if
you just put some thought behind it.
P.S. The pizza idea is a registered trademark of Martinez Ballers
Inc. and any use thereof necessitates a story, credit, a burrito or
all of the above.