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Supply and Demand II
Lesson 12 – 5a & 5b
The Ripple Effect:
Price Elasticity:
Measurement of how sensitive consumers are to price changes. Would the amount of Pizza’s you buy change a lot if the price went up by $1?
Elasticity continued
• Elasticity refers to the responsiveness that a Good or Service has to the change in a different factor influencing that good or service
• If that same pizza increased its price by $10 then how likely do you think it would be that you would buy the same number of pizzas on a regular basis? This sensitivity to change in price is what elasticity refers to.
Price elasticity of Demand:
• If we increased the price of a pizza by 10%
• And due to that increase, if sales of that pizza then dropped by 20%
• Then the elasticity of that pizza would be -2
• Economist don’t look at -/+’s so an elasticity of 2 represents a great deal of change.
• (However) if that same 10% increase in price resulted in a 5% decrease in sales then the elasticity would be ½ (.5) which is a low number = any number less then 1 means it is inelastic
Inelastic demand: quantity demanded by consumers remains the same no matter what the price is.Elastic Demand : quantity demanded changes, however price is constant (think souvenir t-shirts)
Elastic:• Demand is responsive to price changes
• Many substitutes to choose from
Inelastic:
• Price changes have little effect on demand for a certain good.
• More price change
Unit Elastic:
• Unit elastic is the middle point or dividing line between a good or service’s elasticity and when it is inelastic. If a g or s is “unit elastic” then the percent of change in price will be exactly the same as the percent of change in quantity demanded. (A price increase of 10% will result in a quantity change of 10%)
Total Revenue:
Total Revenue Test:• Why does stuff cost what it costs?• TR=P*Q• If purchases increase enough (elastic) after a price
drop then it’s all Good. • If the price drops by 10% but the demand increases
by more than 10% the supplier wins.• Demand is inelastic if there is a price drop but the
demand does not increase enough. • If the change in quantity demanded is less than the
change in price, total revenue will decrease.
Income Elasticity of a Good:
• Measure of how responsive demand for a good or service is when people who are demanding that good have a change in their income.
• Price stays the same but demand Goes up.• Example: New clothing• Most Goods are income elastic.• What happens to the demand curve?
Price Elasticity of supply
• It’s a measure of how responsive producers are to price changes.
• If producers react to rising or falling prices by Greatly changing how much they produce, then supply is elastic.
• More elastic in the long run than the short run.
Price Elasticity of Supply:• Rate of how responsive supply is in accordance to a price change in a good/service.