Last Word: Ch 4 Review due/Quiz Friday Consider: As a business owner, should you raise or lower prices to generate more revenue? Why?

Last Word: Ch 4 Review due/Quiz Friday

Consider: As a business owner, should you raise or lower prices to generate more revenue? Why?

Price and Demand

We know that price is the most significant factor that influences demand Price up, demand down Price down, demand up LAW OF DEMAND…

But what about this…?

Why is he mad?

Why is the cartoon “ironic”?

What does this say about demand?

New question: HOW MUCH DOES DEMAND CHANGE WHEN PRICES CHANGE?

Depending on the product, and a few other factors

Does demand change a lot or a little in response to price changes?

ELASTICITY OF DEMANDChapter 4, Section 3

What is elasticity of demand?

• Elasticity of demand is a concept that describes HOW RESPONSIVE consumers are to price changes in the marketplace.

• Demand is elastic if quantity demanded changes significantly as price changes.

• Demand is inelastic if quantity demanded changes little as price changes.

For example… Items like expensive sports cars, or

name-brand jeans… Are susceptible to price changes; their

demand will change significantly when price changes

Other items, like bread or sugar… Their demand changes very little even when

price changes People still need them almost regardless of

price

There are 3 things you need to know about a product before you can know its “elasticity” First, whether there are readily

available (and roughly equivalent) substitutes

Second, whether the item takes a large portion of a person’s income

Third, whether the item is considered a necessity or a luxury

Factor #1 – Availability of Substitute Goods/Services

• If there is no substitute for a good or service, demand for it tends to be inelastic. (ex. insulin)

• People are, in a sense, forced to buy the product almost regardless of price, so demand doesn’t change very much even if price changes

Factor #1 – Availability of Substitute Goods/Services• However, if many substitutes are

available, demand tends to be elastic. (ex. beef)• People can go elsewhere and buy similar products

(that do basically the same thing) for less money

Factor #2 – Proportion of Income

• Demand for products that take up a significant portion of your income tends to be elastic.• Again, demand for these goods will change

greatly if price changes

Factor #2 – Proportion of Income

• Demand for products that take up little of your income tends to be inelastic.• They don’t cost you a lot, so you don’t think much

about buying less if price changes

Factor #3 – Necessities vs. Luxuries

• Demand for necessities tend to be inelastic. (addictive substances may fall under this category too.)• People need to buy these, so demand changes

very little when price changes, even reductions in price

Factor #3 – Necessity or luxury?• Demand for luxuries tend to be elastic.• That is, people are less likely to keep buying them

when price goes up, and much more likely to buy them when price goes down

What does elasticity look like on a graph?

Elastic

What does elasticity look like on a graph?

Inelastic

Practicing Elasticity

There is an equation for determining elasticity % change in QD over % change in $$

If the number is >1, the product is considered elastic

% QD% Price

Homework: Quiz tomorrow; Ch 4

review due

FrontPage: NNIGN

Bad Newspapers

There are 3 things you need to know about a product before you can know its “elasticity” First, whether there are readily

available (and roughly equivalent) substitutes

Second, whether the item takes a large portion of a person’s income

Third, whether the item is considered a necessity or a luxury

Readily available

/equal substitute?

Large portion of income?

Necessity or luxury?

Elastic or Inelastic demand?

Salt

Cars, in general

Toothpicks

Coffee

Tap water

Chevy Trucks

Gasoline, in the short term

“Heinz” ketchup

Gasoline, in the long term

Movies

Restaurant meals

iPad 3

Will it?

Demand for Pirates tickets: elastic or

inelastic?Price

Quantity Demanded

$75 10,000

$100 8000

$150 5000

$200 4000

$250 2000Another question: At which price is it best for

the Penguins to sell their tickets?

Inelastic

What is the best price for the Pirates?

PriceQuantity

Demanded

$75 10,000

$100 8000

$150 5000

$200 4000

$250 2000

Revenue

$750,000

$800,000

$750,000

$800,000

$500,000

When revenue increases after lowering of price, demand is ELASTIC

When revenue decreases after lowering of price, demand is INELASTIC

The Elasticity of Pizza