Social Studies The Effect of Elasticity on Demand and Supply. Outcome 26

Transcription

1 Social Studies 1211 The Effect of Elasticity on Demand and Supply Outcome 26

2 ACTIVITY: Introduction to Elasticity

3 WHAT IS ELASTICITY? We know that change in price can affect quanity demanded or supplied. Elasticity deals with the degree to which changes in price affect the quantity demanded or supplied. Elasticity is important because it describes the fundamental relationship between price and the demand and supply of goods and services. Sometimes a small change in price can trigger a substantial change in demand or supply. Sometimes a large change in price has only a slight effect on demand and supply. Elasticity shows sensitivity to price changes.

4 DESCRIBING ELASTICITY Unitary - A change in price causes an equal or proportional change in demand and supply. For example: A 5% increase in price results in a 5% decrease in demand. Elastic - A change in price causes a relatively larger change in demand or supply. These are typically things that we do not require. These are more sensitive goods. For example: A 5% increase in prices results in a 20% decrease in demand.

5 DESCRIBING ELASTICITY Inelastic - A change in price causes a relatively smaller change in demand or supply. These goods are less sensitive to price change. For example: A 5% increase in price results in a 1% decrease in demand.

6 RELATIVE ELASTICITY OF DEMAND Brand Name Chocolate Bars Gas Electricity Salt Bread Milk Instant Coffee Movie Tickets Live Theatre Cars

7 FACTORS AFFECTING ELASTICITY OF DEMAND Essentials vs. Non-Essentials - goods and service that satisfy needs tend to be inelastic, while those that satisfy wants are elastic. Relative Cost - goods or services that take up a very small percentage of household income tend to be inelastic (e.g., chocolate bar), while those that take up a higher percentage tend to be elastic (e.g., vacation travel). Substitutes - goods or services that have easily available alternatives tend to be elastic (e.g., fast food), and vice versa. Time - the more time a consumer has available to acquire, the more likely it is that they will find a substitute, thus increasing elasticity.

8 GRAPHING ELASTICITY OF DEMAND Flat, almost horizontal slope. A slight increase in price can trigger a massive reduction in quantity demanded. This may be due to availability of many substitutes and because the item is not considered essential (want). Very steep slope. The change in price will have very little effect on the quantity transacted. This may be due to the item being essential (need) or a lack of substitutes available.

9 GRAPHING ELASTICITY OF SUPPLY Have a flatter, almost horizontal slope Small increases in prices can trigger massive increases in the quantity supplied Very steep slope Massive price increase will increase the quantity supplied only by a small amount.

10 FACTORS AFFECTING THE ELASTICITY OF SUPPLY Capacity - does the producer have the means to produce more; for example, could the factory add an extra shift? Product Longevity - can the item produced be stored in a warehouse and sold later; for example, unsold canoes could be stored until next summer, but many types of produce (breads, fruit, vegetables, etc..) cannot be stored for very long before spoiling. Time - how much time does the producer need to increase supply? For example, to increase the production of naturally grown Christmas trees would take several years.

11 SITUATION QUESTIONS. A REVIEW. 1. Is gasoline inelastic or elastic? Why? 2. Are plane tickets inelastic or elastic? Why? 3. Are funerals inelastic or elastic? Why? 4. Are ambulance trips inelastic or elastic? Why? 5. Is toilet tissue inelastic or elastic? Why? 6. Is bread inelastic or elastic? Why? 7. Is milk inelastic or elastic? Why? 8. Are cigarettes inelastic or elastic? Why?

12 ASSIGNMENT: Demand and Supply