• Learning Objective:
– Today I will be able to determine elasticity of demand by calculating price changes in consumer goods.
• Agenda:
1. Learning Objective
2. Lecture: Ch. 4.2 Elasticity of Demand
3. Worksheet
4. Exit Slip
CONTEMPORARY ECONOMICS:
LESSON 4.2
1

Title: Ch. 4.2 Elasticity of Demand
• Elasticity:
– Consumer responsiveness to price change.
• Elasticity of
demand measures the percentage
change in quantity demanded divided by percentage change in price.
Elasticity of demand
% change in quantity demanded
%change in price
CONTEMPORARY ECONOMICS:
LESSON 4.2
2

$15
12
9
6
3
0
D
8 14 20 26 32
Millions of pizzas per week
CONTEMPORARY ECONOMICS:
LESSON 4.2
3

1. Pizza falls from $12 to $9—How much did it decrease?
2. Since pizza price change, quantity demand rose from 6 million to 14 million—How much more was demanded?
3. Calculate % of price change & quantity demanded.
4. Elasticity of demand=
% change in quantity demanded
%change in price
CONTEMPORARY ECONOMICS:
LESSON 4.2
4

– Demand is:
• Elastic if great than 1.0
• Unit elastics= 1.0
• Inelastic if between 0 and 1.0
• Lowering prices
– Lowers total revenue for each unit sold.
– Quantity demanded increases, which may increase total revenue
• Check for Understanding:
• So then what is the elasticity of pizza since it’s price decreased?
CONTEMPORARY ECONOMICS:
LESSON 4.2
5

CONTEMPORARY ECONOMICS:
LESSON 4.2
6

What does the elasticity of demand measure?
The elasticity of demand measures the percentage change in quantity demanded divided by the percentage change in price.
Elasticity of demand
Percentage change in quantity demanded
Percentage change in price
CONTEMPORARY ECONOMICS:
LESSON 3.3
7

• Determinants of
Demand Elasticity
– Availability of substitutes
• Less elastic if not many substitutes.
• More elastic if more substitutes available.
– Consumer’s budget & importance of item
• What consumer’s are willing & able to buy
• Ex. Increase in houses, less is demanded, more responsive.
• Ex. Less responsive to crease in paper towels, not as important as a house.
– Time
• Need more time to find substitutes
• Ex. In 1973 & 1974, the OPEC oil cartel raised prices of oil by 45%. At first consumption decreased by 8%. But, furthered decreased with more time.
– Elasticity of demand, greater at the long-run than short-run.
CONTEMPORARY ECONOMICS:
LESSON 4.2
8

$1.25
1.00
0
D y
D m
D w
50 75 95100 Millions of gallons per day
CONTEMPORARY ECONOMICS:
LESSON 4.2
9

Product
Electricity (residential)
Air travel
Medical care and hospitalization
Gasoline
Movies
Natural gas (residential)
Short Run Long Run
0.1
0.1
1.9
2.4
0.3
0.4
0.9
1.4
0.9
1.5
3.7
2.1
CONTEMPORARY ECONOMICS:
LESSON 4.2
10

What are the determinants of demand elasticity?
?
Availability of substitutes consumer’s budget time
Some elasticity estimates
CONTEMPORARY ECONOMICS:
LESSON 3.3
11

• What is a good or service you consume? Is it elastic, inelastic, or unit elastic? Explain how do you know?
CONTEMPORARY ECONOMICS:
LESSON 4.2
12