Unit 2: Supply, Demand, and Consumer Choice

Supply and Demand Review 1. Define the Law of Demand2. Define the Law of Supply3. What is the difference between a change in

demand and a change in quantity demanded?

HOW MUCH MORE OR LESS?

THE LAW OF DEMAND SAYS...

Consumers will buy more when P and less when prices

3

ElasticityElasticity shows how much quantity will

change, when price changes.

1. Elasticity of DemandElasticity of Demand-

• Measurement of consumers change in QD (quantity demanded) when P (price) changes.

• What will happen if P ? How much will it effect QD

Inelastic Demand

Inelastic Demand

•If price , QD will fall a little•If price , QD increases a little.

~people will continue to buy it.

20%

5%

INelastic = Quantity changes little to a change in price.

Examples:•Gasoline•Milk

A INELASTIC demand curve is steep! (looks like an “I”)

•Medical Care•Toilet paper

Inelastic Demand

20%

5%

General Characteristics of INelastic Goods:

•Few Substitutes•Necessities•Required now

• Elasticity coefficient( 系数 ) < 1

Elastic Demand

Elastic Demand

•If price, QD will fall a lot•If price, QD increases a lot.

Price changes little~ QD changes a lot

Elastic = Quantity is sensitive to a change in price.

An ELASTIC demand curve is flat!Examples:•Soda•Cars•Beef

•Pizza•Gold

Elastic DemandGeneral Characteristics of

Elastic Goods:• Many Substitutes• Luxury goods• Large part of income• Lots of time to decide

•Elasticity coefficient > than 1

Price Elasticity of Demand

Price elasticity of demand equals

P

Q

D

Q2

P2

P1

Q1

P rises by 10%

Q falls by 15%

15%

10%= 1.5

Price elasticity of demand

=% change in Qd

% change in P

Example:

Calculating Percentage Changes• we use the midpoint method:

P2 – P1(P2 + P1)/2

x 100%% change in P =

% change in Q = Q2 – Q1(Q2 + Q1)/2

x 100%

1. Calculating Percentage Changes

• Using the midpoint method, the % change in P equals

$250 – $200$225

x 100% = 22.2%

P1 200 Q1 8P2 250 Q2 12

% change in P = P2 – P1(P2 + P1)/2

x 100%

1. Calculating Percentage Changes

The % change in Q equals

12 – 8

10x 100% = 40.0%

P1 200 Q1 8P2 250 Q2 12

% change in Q = Q2 – Q1(Q2 + Q1)/2

x 100%

1. Calculating Elasticity• Using the midpoint method, the % change

in P equals

The price elasticity of demand equals

40/22.2 = 1.8

% Δ Q % Δ P

= Elasticity Coefficient

Elasticity Coefficients

Elasticity Coefficients:Greater than 1 = Elastic (ΔP < ΔQ)Less than 1 = Inelastic (ΔP > ΔQ) = 1= Unit Elastic (ΔP = ΔQ)

ACTIVE LEARNING ACTIVE LEARNING 1

Calculate an elasticityCalculate an elasticity

Use the following information to calculate the price elasticity of demand for hotel rooms:

if P = $70, Qd = 5000

if P = $90, Qd = 3000

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ACTIVE LEARNING ACTIVE LEARNING 1

AnswersAnswers

Use midpoint method to calculate % change in Qd

(5000 – 3000)/4000 = 50%

% change in P

($90 - $70)/$80 = 25%

The price elasticity of demand equals

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

50%25%

= 2.0

Elastic or Inelastic?Beef-

Gasoline- Real Estate-

Medical Care- Electricity-

Gold-

Elastic- 1.27INelastic - .20Elastic- 1.60INelastic - .31INelastic - .13Elastic - 2.6

What about the demand for medicine?

Perfectly INELASTIC(Coefficient = 0)

What if % change in quantity demanded equals

% change in price?

Unit Elastic (Coefficient =1)45 Degrees

Total Revenue TestUses elasticity to show how changes in price will

affect total revenue (TR). (TR = Price x Quantity)

Elastic Demand- • Price increase causes TR to decrease• Price decrease causes TR to increase

Inelastic Demand- • Price increase causes TR to increase• Price decrease causes TR to decrease

Unit Elastic-• Price changes and TR remains unchanged

Ex: If demand for milk is INelastic, what will happen to expenditures on milk if price increases?

Is the range between A and B, elastic, inelastic, or unit elastic?

A

B

10 x 100 =$1000 Total Revenue

5 x 225 =$1125 Total Revenue

Price decreased and TR increased, so…

Demand is ELASTIC

125%

50%

2. Price Elasticity of SupplyElasticity of Supply- • Elasticity of supply shows how sensitive producers

are to a change in price.

Elasticity of supply is based on time limitations.Producers need time to produce more.

INelastic = Insensitive to a change in price (Steep curve)• Most goods have INelastic supply in the short-run Elastic = Sensitive to a change in price (Flat curve)• Most goods have elastic supply in the long-runPerfectly Inelastic = Q doesn’t change (Vertical line)• Set quantity supplied

1.Demand2.Substitute3.Elastic4.Total Revenue Test

1.Supply 2.Inelastic3.Elasticity Coefficient

Elasticity Practice

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