Today’s LEQ: How do you measure a consumer’s responsiveness to a change in price?
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Transcript of Today’s LEQ: How do you measure a consumer’s responsiveness to a change in price?
Elasticity of Demand
Today’s LEQ: How do you measure a consumer’s responsiveness to a change in price?
Elasticity of Demand
Measures how willing buyers are willing/able to change buying habits in response to a price change
Makes discussion of demand quantitative: How does a change in price impact quantity demanded for a given good or service? For example, gas prices dropped to $3.00
per gallon – how much will this change consumer behavior?
Elastic vs. Inelastic Demand Demand for a g/s
= elastic if QD changes substantially
Demand for a g/s = inelastic if QD changes slightly
Are you smelling what I’m stepping in?
Your classmates will drop each item to the ground from shoulder height. Which item is the most elastic/inelastic and why? Volleyball Basketball Softball Foam Ball Football
Phrase your answer in terms of price and quantity demanded.
Today’s Warm Up
It’s been a while since Monday… Refresh your memory by stringing together the terms below into a statement that recaps what you’ve learned about the elasticity of demand thus far:
Responsiveness, price change, demand, elasticity, inelastic, elastic
Determinants of Elasticity
No universal rule on determining elasticity – too many social, economic, psychological factors that come into play
4 general rules of thumb that can be helpful: Substitutability Proportion of Income Spent on Product Necessities vs. Luxuries Definition of the Market Time Horizon
Are you picking up what I’m putting down?
Using your understanding of the determinants of demand elasticity, rank the following g/s in order of most elastic to least elastic. Be prepared to defend your placement. Insulin Cigarettes Running Shoes Granny Smith Apples BMW convertible Gas
How do you calculate elasticity? There are two ways… simple and complicated
(we have to know both ways ) Simple way first:
This will give you the elasticity coefficient – the change in QD proportionate to the change in price
Use absolute value (eliminate (-) or (+) sign)
Got it?
For example, suppose a 10% increase in the price of an ice cream cone causes the amount of ice cream you buy to fall by 20%. Calculate the elasticity of demand using the simple formula.
One more to make sure…
For example, suppose a 20% increase in the price of tacos causes the amount of tacos you buy to fall by 5%. Calculate the elasticity of demand using the simple formula.
“Snicker Effect” Recap
Did the market demand for Snickers seem to be elastic or inelastic? How do you know?
Were the Snicker Bars an inferior good or normal good? How do you know?
Which goods were complements or substitutes? How do you know?
Video Clip
Add to your notes as you watch. You will be asked to revisit your brainstorming activity after the video. Be prepared!
http://youtu.be/4oj_lnj6pXA