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ELASTICITY OF DEMAND

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					ELASTICITY OF (LOVE) DEMAND
• Elasticity of (Love) Demand – describes
  how consumers will react to a change
  in the price of a good (action of a
  person). Their reaction depends on the
  original price of the good and the way
  the good is used by consumers.
   ELASTICITY OF DEMAND
• Elasticity of Demand –
  – FOR EXAMPLE
    • Are you the kind of person who loves in such a
      way that your love can weather any kind of
      storm? #3
    • Some goods you will always find money to buy
      even if the price were to rise drastically.
       – Gasoline
       – Feminine Products
    • Other goods you would cut back on or cut out
      all together.
       – Vitamins (see question #4)
• Your demand for a good that you will
  keep buying (KEEP LOVING) despite a
  price increase is “INELASTIC.” “Your
  demand does not change”
  – Example – Gasoline increase in my truck
    cost me $77.00 to fill up. I fill up 95% of the
    time I buy gasoline. Therefore my demand
    for gasoline (AT THIS POINT) is inelastic.
  – If your love for him or her is still strong no
    matter what he or she does your love is
    INELASTIC!
• Your demand for a good that you will
  NOT keep buying (OR KEEP LOVING)
  with a price increase or you will buy
  less is “ELASTIC.” “Your demand
  changes”
  – Example – I used to have text messaging
    on my phone at $5.00/mo. for unlimited
    texting. At $10.00/ mo. for unlimited texting
    I got rid of text messaging. At this point I
    am highly ELASTIC.
  –DO NOT CALL ME CHEAP!!!!
  –I AM SIMPLY ELASTIC, VERY
   SENSITIVE TO PRICE CHANGES!
• 5 Factors Affecting Elasticity – certain
  factors affect or determine what goods are
  elastic or inelastic. (know the factors!)
  – Availability of substitutes – if there are few
    or no substitutes for a good when the price
    rises you will more than likely still buy it.
     • Example – See question 10!
     • Disposable diapers – if two brands break your
       baby out and one brand is the brand that your
       baby can use your demand will more than likely
       be inelastic because there are no available
       substitutes.
– Availability of substitutes – if there are few or no
  substitutes for a good when the price rises you
  will more than likely still buy it.
  • Example –
     – Disposable diapers – if two brands break your baby out and
       one brand is the brand that your baby can use your demand
       will more than likely be inelastic because there are no
       available substitutes.
     – Cloth diapers or an available brand – if a person is willing to
       use cloth diapers or happen to find another brand that does
       not cause the baby to break out the demand for that brand of
       disposable diapers become elastic.
– Relative Importance – If you spend a large
  portion of your income on a good or if the good
  is essential a price increase will force you to
  make some choices. See question 11!
– Relative Importance – If you spend a large
  portion of your income on a good or if the good
  is essential a price increase will force you to
  make some choices.
  • Example –
     – Car insurance on a newer vehicle – you have to have full
       coverage if you financed it.
     – Life insurance – if you are the primary breadwinner in your
       home you HAVE to continue to provide for your family. The
       older you get the higher an insurance premium.
– Necessities v. Luxuries – a necessity is a good
  people will always buy even when the price
  increases.
  • Example – parents often regard milk as a necessity. If
    the price of milk rises from $2.50 to $4.50 they will
    still purchase milk. Their demand for milk is inelastic.
– Necessities v. Luxuries – a necessity is a good
  people will always buy even when the price
  increases. See question 6 & 7!
  • Example – parents often regard milk as a necessity. If
    the price of milk rises from $2.50 to $4.50 they will
    still purchase milk. Their demand for milk is inelastic.
  • Example – the same parents may regard steak as a
    luxury. If the price of steak rises from $2.50 /lb. to
    $4.50 /lb. they may decide not to eat steak. Their
    demand for steak is elastic.
– Change Over Time – often when there is a price
  increase consumers need time to adjust to the
  increase. Until they can adjust their demand is
  inelastic. Once they have had time to find
  substitutes their demand becomes elastic.
  Question13!
– Change Over Time – often when there is a price
  increase consumers need time to adjust to the
  increase. Until they can adjust their demand is
  inelastic. Once they have had time to find
  substitutes their demand becomes elastic.
  • Example
     – The baby has just used the last diaper. The mother runs to
       the store and finds that the price of the disposals she uses
       has increased by 30%. She has to buy right now because
       she doesn’t have time to find an alternative brand. Her
       demand is inelastic.
     – Over the next few days she discovers an off brand diaper
       that she has not previously tried. She buys a small package
       and tries them on her baby. They work1 The baby doesn’t
       break out! Her demand for the first brand now becomes
       elastic because she has had time to find a substitute.
– Elasticity & Revenue – The elasticity in demand
  determines how a change in prices affect a
  firm’s total revenue.
  • A firm’s total revenue is the amount of money the
    company receives for selling its goods.
  • Total revenue & Elastic demand – when the demand
    of a good is elastic, raising the price of the good a
    certain percentage will decrease the demand by a
    larger percentage therefore a company will lose profit
    / revenue.
  • Total revenue of Inelastic Demand – when the
    demand of a good is inelastic, raising the price of the
    good a certain percentage will decrease the demand
    by a smaller percentage than the amount raised
    therefore a company will increase profit / revenue.
• CALCULATING ELASTICITY –
  (REMEMBER THIS FORMULA FOR
  CALCULATING ELASTICITY) in order to
  calculate elasticity take the percentage of
  change in the demand of a good and
  divide and divide the number by the
  percentage of change in the price of a
  good.
percentage of change quantity demanded

percentage of change in the price of a good
Look at the percentage of
change in quantity
                             Price of       Quantity
demanded from .50 to .75     Snicker’s      demanded
                             .50 original   10 original
                             price          demand
 To find the percentage of
 change in quantity or       .75            7
 price subtract the new
 number from the original    1.00           5
 number & divide the
 result by the original      1.25           4
 number
                             1.50           2

                             2.00           0
 Look at the percentage of      Look at the percentage of
 change in quantity             change in price from .50
 demanded from .50 to .75       to .75

 To find the percentage of       .50 - .75 = -.25
 change in quantity or
 price subtract the new          . 25 /-. 50 = .50 x 100 = 50%
 number from the original
 number & divide the percentage of change quantity demanded
 result by the original
 number                 percentage of change in the price of a good

10 - 7 = 3                      30/50 = .6

3 / 10 = .3 x 100 = 30%

				
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