Elasticity of Demand, price ceilings, price floors

Mr. Odren

Refers to price responsiveness The measure of the price elasticity of

demand is how much consumers respond to a given change in price.

Economists measure the reaction of consumers to changes in prices

This measurement is called….PRICE ELASTICITY OF DEMAND!!!!

Price Elasticity of Demand

Demand is not affected by changes in price. The good/service is a MAJOR necessity. There are no satisfactory substitutes for the

specific good/service.o Ex: Gasoline for automobiles.o Regardless of the price, people still demand the same

amount of gasoline every week. o Ex: Insulin to a diabetic. If they don’t buy it they may

die. Will pay the price of Insulin Mathematically, inelastic goods and services have

a price elasticity of demand that is less than 1.

Inelastic Demand

This is what an inelastic good/service looks like when graphed…..

Graphing Inelastic Demand

Here are some examples of inelastic goods… Salt – (small % of consumer income, few

substitutes) Matches – (small % of consumer income) Toothpicks – (small % of consumer income) Gasoline – Coffee – Tobacco products – Automotive transportation – Insulin –

Values of Inelastic goods/services

A rise or fall in the price of a product GREATLY affects the amount which people are willing to buy.

Goods that do have sufficient substitutes are considered “elastic”.

The good and/or service is not a major necessity. This means that if the price of an elastic good increases

too much, then consumers will purchase a substitute good and be just as satisfied…

Example of an Elastic Goodo Meals at a restauranto $15.99 Chicken Alfredo at Olive Gardeno Substitute for a cheaper mealo Cook at home

Mathematically, elastic goods and services have a price elasticity of demand, greater than 1.

Elastic Demand

This is what an “elastic” good looks like when graphed….

Graphing Elastic Demand

Below are some examples of Elastic…. Private education – Meals at a restaurant – Ford cars – Movie tickets - St. Thomas vacation - Fresh Tomatoes –

Values of Elastic goods/services

1. Existence and similarity of substituteso More substitutes, more responsive consumers will be to a

change in price.o Ex: Diet Coke/Diet Pepsi

2. Percentage of a person’s total budget devoted to the purchases of that goodo If you do not spend much of your total budget on a

particular good, you will probably not often notice increases in the price of that good. (toothpicks, matches, salt)

3. Time allowed for the consumer to adjust to the price change.o Takes a longer time to adjust to a new priceo Longer time needed…greater price elasticity of demand

What determines price elasticity of demand?

Yes!!! Price Floor and Price Ceiling If the government wants to establish a

minimum price for a good/service, it is called a price floor.

If the government wants to establish a maximum price for a good/service, it is called a price ceiling.

Remember, U.S. not a pure Market economy, but Mixed (Free Market AND Gov’t)

Can the government place limits on pricing?

PRICE CEILINGS Always BELOW

equilibrium & cause Shortage!!

What does this mean? Keeps demand high Benefits consumers Producers lose money Ex. Rent controls for

apartments, at times gas prices

PRICE FLOORS Always ABOVE

equilibrium & cause Surplus!!

Benefits Producers Consumers lose –

have to pay higher prices

Ex. Agriculture crop prices, Min. Wage law

COMPARISON

Graphical viewPRICE CEILING

PRICE FLOOR

Video clip on impact of rent control. Is it really the most effective way to help

people afford housing? Does it have unintended consequences?

Video Clip