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2 Students: Go to: m.socrative.com Room #: When prompted to use your tech, answer the on-screen question.

3 Using Your Tech: T/F: Consumers were Panic in 2004 Flu vaccine contamination Half of the U.S. supply was destroyed \$8.50 to \$90.00 for one dose Answer: Consumers were unresponsive to this price hike. responsive and sensitive to this price hike.

4 Why economists use elasticity to measure responsiveness to changes in prices or incomes Why the price elasticity of demand, and the cross-price elasticity of demand are important indicators of consumer behavior Why the price elasticity of supply is an important indicator of producer behavior What factors influence the size of these various elasticities

5 Measurement of responsiveness and sensitivity of consumers to price changes. When Coefficient is Greater than 1 Equal to 1 Less than 1 Then Demand is Elastic Demand is Unit Elastic Demand is Inelastic To Note: Coefficients are negative but we use the absolute value negative signs are not needed.

6 Percent Change in QD and P % Change in Qd % Change in Price Mid-Point Formula Q2 Q1 (Q1 +Q2)/2 P2 P1 (P1+P2)/2

7 Using Your Percent Change in QD and P % Change in Qd % Change in Price Tech: Q1 Answer:.11 The medical suppliers decided to increase the price of flu vaccines by 90%. In response the Qd decreased by 10%. Solve. Q2 Answer: 5 General Mills decided to increase the price of their Lucky Charms by 10%. In response the Qd decreased by 50%. Solve.

8 1 Price 2012 \$0.90 1, \$ Price 2012 \$ \$ Quantity Demanded Quantity Demanded Mid-Point Formula Q2 Q1 (Q1 +Q2)/2 P2 P1 (P1+P2)/2

9 The price of strawberries falls from \$1.50 to \$1.00 per carton and the quantity demanded goes from 100,000 to 200,000 cartons. Using the mid-point method determine the elasticity coefficient.

10 Goods Inelastic Demand Eggs.1 Beef.4 Stationary.5 Gasoline.5 Elastic Demand Housing 1.2 Restaurant Meals 2.3 Airline Travel 2.4 Foreign Travel 4.1 Price Elasticity of Demand

11 Perfectly Elastic Perfectly Inelastic

12 By observing what happens to Total Revenue as prices change, we can determine elasticity. Total Revenue = P * Q If Demand is When Prices Increase Then Unit Elastic Elastic Inelastic Total Revenue will stay the same Total Revenue will Decrease Total Revenue will Increase **Total Revenue shares a direct relationship with Price when Demand is Inelastic and Total Revenue shares an indirect relationship with Price when Demand is Elastic**

13 P When prices are low, TR So is total revenue D Q Quantity Demanded

14 P Total revenue rises with price to a point... TR D Q Quantity Demanded

15 P Total revenue rises with price to a point... TR then declines D Q Quantity Demanded

16 P Total revenue rises with price to a point... TR then declines D Q Quantity Demanded

17 Availability of close substitutes Whether the good is a necessity or luxury Share of income spent on the good Time elapsed since price change

18 Go to Discussion Prompt: Who is more responsive to price changes in college tuition: 2 year school students or 4 year school students?

19 Type of Good Substitutes Compliments Positive Coefficient Negative Note: The sign is very important in determining cross-elasticity! Between goods A and B % Change in Q of A Demanded % change in price of B

20 Between Qd and Income % change in Quantity Demanded % change in income Coefficient Type of Good Positive Negative Normal Good Inferior Good Note: The sign is very important in determining income-elasticity!

21 As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the crossprice elasticity of demand between butter and margarine. Expensive restaurant meals are incomeelastic goods for most people, including Mike. Suppose his income falls by 10% this year. What can you predict about the change in Mike s consumption of expensive restaurant meals?

22 Economists use income elasticity of demand to predict which industries will grow most rapidly. As incomes grow income-elastic goods will grow faster (Luxury Goods) Second homes, international travel, As incomes grow income inelastic goods will grow, but slower than income. Necessities Food and Clothing

23 Time Amount of time producers have for responding to a change in product price Shifting resources from production of other products The longer the time, the greater the resource variability

24 *Immediately after a change in market price. *Too short for producers to respond with a change in quantity supplied. *An increase in demand without enough time to change supply causes an increase in price.

25 *Period of time long enough to enable producers to change the quantities of some, but not all of the resources they employ. *An increase in demand with less intensity supply use causes a lower increase in price.

26 *Period of time long enough to enable producers to change the quantities of all the resources they employ. *An increase in demand in the long run causes even more elastic response less price increases.

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