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.