I want to talk about two products for the nextfew minutes.

Insulin and Bicycles

Every morning, millions of diabetics give themselves a shot of insulin just to stay alive.

In the U.S., there areover 10 million diabetics,110 million worldwide.

(2001)

Now you say to yourselfagain, so what do insulin and bicycleshave in common?

Diabetics ride bicycles.

Questions• What does Price Elasticity of Demand

Measure?– A measure of how much the quantity demanded

of a good responds to a change in the price of that good.

• What are some Determinants of Elasticity?– Proportion of Income – Availability of Substitutes– Necessities vs. Luxuries– Time

P P

Q QInsulin Bicycles

10 m

$1

$2

$3

D

$300

100

$200

200

$100

500

D

P P

Q QInsulin Bicycles

10 m

$1

$2

$3

D

$300

100

$200

200

$100

500

D

One has few substitutes and one has many? Few substitutes Many substitutes

One is a necessity and the other is a luxury? Necessity Luxury

One is expensive and the other is inexpensive Inexpensive Expensive

INELASTIC ELASTIC

P P

Q QInsulin Bicycles

10 m

$1

$2

$3

D

$300

100

$200

200

$100

500

D

P Q$3 10m$2 10m$1 10m

P Q$300 100$200 200$100 500

x x= =TR TR

$10m$20m$30m $30,000

$40,000$50,000x

xx

xxx

Special Cases

P P

Q Q

Perfectly Inelastic

Ed = 0

Perfectly Elastic

Ed = ∞

Determinants of Demand Elasticity

•Can the purchase be delayed?

•Are Adequate Substitutes available?

•Does the Purchase use a large portion of income?

Total Revenue Test• If a product has elastic demand a price

increase will result in a decrease in Total Revenue

• If a product has inelastic demand a price increase will result in an increase in Total Revenue

• If a product has unit elastic demand a price increase or decrease will result in no change in Total Revenue

Total Revenue Test

Price Change

Change in TR

Price Change

Change in TR

Elastic

Opposite

Unit Elastic

N/C N/C No Change

Inelastic Same

ELASTICITY QUESTIONS

1. Mr. Lopez is a butcher who recently raised the price of steak at his market from $1.50 to $2.00 a pound. Correspondingly, his sales dropped from 200 pounds per day to 100 pounds per day. Figure out the elasticity of demand for steak at Lopez’ market. Is it elastic or inelastic?

2. At 25 cents apiece, Mr. Smith sells 100 chocolate bars per week. If he drops his price to 20 cents, his weekly sales will increase to 110 bars. Is the demand for chocolate bars elastic or inelastic? Prove your answer.

3. Suppose that 30 tons of coal are purchased at a price of $20 per ton and 50 tons are purchased at $15 per ton. What is the elasticity coefficient in this example?

Closure

• With a Partner come up with 5 products you believe will have Elastic Demand and 5 products that will have Inelastic Demand:

ELASTIC INELASTIC

ELASTIC INELASTIC