How sensitive is demand?

Slope of a Demand Curve
• What does slope indicate about a product?
• Do all demand Curves have the same slope ?
Demand Curves

Slope of Demand Curve
• Indicates the responsiveness of Quantity
Demanded to a change in Price .
• If the price of a good increases 20% => how much does QTY demand decrease?

Elastic Goods
Px
• Elastic demand curves are flat
– Sensitive to price changes
D
1
Qty
• A ↑ Price leads to a greater ↓ in Qty Demanded

Inelastic Goods
• Inelastic goods are NOT sensitive to price changes
•
% Change in Price leads to a Smaller % change in Qty Demanded

Inelastic Goods
Px
• Inelastic demand curves are steep
– Not Sensitive to price changes
D
1
• A ↑ Price leads to a smaller ↓ in Qty Demanded
Qty

Elasticity depends on:
• # of close substitutes
• N ecessity
• Proportion of income spent
•
Time period

Price Elastic or Price Inelastic ?
Soda Gasoline
Price Inelastic
No real substitutes
Price Elastic
Many substitutes
Heart Surgery
Price Inelastic
Necessity &
No real substitutes,
Short time period
Table Salt
Price Inelastic
Small proportion of income, no good substitute

Elastic Goods Inelastic Goods

Why does a business Care?
•
Total Revenue
•
Price * Quantity = Total Revenue
Elasticity determines the effect on total revenue

Total Revenue & Inelastic Demand

Total Revenue & Elastic Demand

Total Revenue
Profit
Total Revenue - Total Expenses = Profit

What you need to know!
• More elastic demand curves are flat
• Elastic means Qty D is sensitive to Px Changes
• Total Revenue => Prices elastic goods
• Total Revenue => Prices inelastic goods

Elasticity of Demand Practice Problems PROBLEM #1
•
Consider the degree of elasticity of demand for hard candy. Draw the Demand Curve for hard candy with your best educated guess about the proper slope for its elasticity/inelasticity.
•
Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at Point E the equilibrium price and quantity demanded are P=$2 per pound
Qty Demanded=1000 pounds
•
Now, imagine that Candy Manufacturers raise the price of a pound of candy from
$2/pound to $4/pound; locate the new point on the demand curve that shows the quantity demanded at $4 per pound.
•
With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

PROBLEM #2
•
Consider the degree of elasticity of demand for gasoline.Draw the Demand Curve for gasoline with your best educated guess about the proper slope for its elasticity/inelasticity.
•
Label a point on the demand curve Point E (for equilibrium. Show on the x and y axis that at
Point E the equilibrium price and quantity demanded are P=$3 per gallon Qty
Demanded=gallons
•
Now, imagine that Oil Manufacturers raise the price of a gallon of gasoline from $3/gallon to
$5/gallon; locate the new point on the demand curve that shows the quantity demanded at
$5/gallon.
•
With such a price change, would total revenue increase or decrease? Show this graphically and explain in writing why this is so.

ELASTIC DEMAND INELASTIC DEMAND

.
Total Revenue & Inelastic Demand
Price increases from $6 to $10
Total Revenue increases from A to B
A = $10 * 18 = $180
B = $6 * 20 = $120
$10
$6
.
18 20
D
1

Total Revenue & Elastic Demand
Price
D
1
Quantity

Elastic Goods
• Elastic goods have demand which is very sensitive to price changes
• A % Change in Price leads to a greater % change in Qty Demanded .

PRICE
Inelastic Demand Curve
Quantity

PRICE
Elastic Demand Curve
Quantity

Gasoline
Inelastic or Elastic?
Soda
Heart Surgery
Table Salt

Total Revenue & Inelastic Demand
Total Revenue
$10
$6
D
1