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Supply and Demand II Lesson 12 – 5a & 5b The Ripple Effect: Price Elasticity: Measurement of how sensitive consumers are to price changes. Would the amount of Pizza’s you buy change a lot if the price went up by $1? Elasticity continued • Elasticity refers to the responsiveness that a Good or Service has to the change in a different factor influencing that good or service • If that same pizza increased its price by $10 then how likely do you think it would be that you would buy the same number of pizzas on a regular basis? This sensitivity to change in price is what elasticity refers to. Price elasticity of Demand: • If we increased the price of a pizza by 10% • And due to that increase, if sales of that pizza then dropped by 20% • Then the elasticity of that pizza would be -2 • Economist don’t look at -/+’s so an elasticity of 2 represents a great deal of change. • (However) if that same 10% increase in price resulted in a 5% decrease in sales then the elasticity would be ½ (.5) which is a low number = any number less then 1 means it is inelastic Inelastic demand: quantity demanded by consumers remains the same no matter what the price is. Elastic Demand : quantity demanded changes, however price is constant (think souvenir t-shirts) Elastic: • Demand is responsive to price changes • Many substitutes to choose from Inelastic: • Price changes have little effect on demand for a certain good. • More price change Unit Elastic: • Unit elastic is the middle point or dividing line between a good or service’s elasticity and when it is inelastic. If a g or s is “unit elastic” then the percent of change in price will be exactly the same as the percent of change in quantity demanded. (A price increase of 10% will result in a quantity change of 10%) Total Revenue: Total Revenue Test: • Why does stuff cost what it costs? • TR=P*Q • If purchases increase enough (elastic) after a price drop then it’s all Good. • If the price drops by 10% but the demand increases by more than 10% the supplier wins. • Demand is inelastic if there is a price drop but the demand does not increase enough. • If the change in quantity demanded is less than the change in price, total revenue will decrease. Income Elasticity of a Good: • Measure of how responsive demand for a good or service is when people who are demanding that good have a change in their income. • Price stays the same but demand Goes up. • Example: New clothing • Most Goods are income elastic. • What happens to the demand curve? Price Elasticity of supply • It’s a measure of how responsive producers are to price changes. • If producers react to rising or falling prices by Greatly changing how much they produce, then supply is elastic. • More elastic in the long run than the short run. Price Elasticity of Supply: • Rate of how responsive supply is in accordance to a price change in a good/service.