I want to talk about two products for the next
few minutes.
Insulin and Bicycles
Every morning, millions of diabetics give
themselves a shot of insulin just to stay alive.
In the U.S., there are
over 10 million diabetics,
110 million worldwide.
(2001)
Now you say to yourself
again, so what do
insulin and bicycles
have in common?
Diabetics ride bicycles.
Questions
• What does Price Elasticity of Demand
Measure?
– A measure of how much the quantity demanded
of a good responds to a change in the price of
that good.
• What are some Determinants of Elasticity?
–
–
–
–
Proportion of Income
Availability of Substitutes
Necessities vs. Luxuries
Time
P
P
$300
$3
$2
$200
$1
$100
D
10 m
Insulin
Q
D
100 200
500 Q
Bicycles
P
$3
INELASTIC
P
ELASTIC
$300
$2
$200
$1
$100
D
D
10 m
100 200
500 Q
Q
Insulin
Bicycles
Few substitutes
Many substitutes
One has few substitutes and
one has many?
Necessity
Luxury
One is a necessity and the other is a luxury?
Inexpensive
Expensive
One is expensive and the other
is inexpensive
P
P
$300
$3
$2
$200
$1
$100
P
$3
$2
$1
D
10 m
Insulin
x Q =
x 10m
x 10m
x 10m
Q
TR
$30m
$20m
$10m
D
100 200
500 Q
Bicycles
P x Q = TR
$300 x 100 $30,000
$200 x 200 $40,000
$100 x 500 $50,000
Special Cases
P
P
Q
Q
Perfectly Inelastic
Perfectly Elastic
Ed = 0
Ed = ∞
Determinants of Demand
Elasticity
•Can the purchase be
delayed?
•Are Adequate Substitutes
available?
•Does the Purchase use a
large portion of income?
Total Revenue Test
• If a product has elastic demand a price
increase will result in a decrease in Total
Revenue
• If a product has inelastic demand a price
increase will result in an increase in Total
Revenue
• If a product has unit elastic demand a price
increase or decrease will result in no change
in Total Revenue
Total Revenue Test
Price Change
Change in TR
Price Change
Change in TR
Elastic




Opposite
Unit
Elastic

N/C

N/C
No
Change
Inelastic




Same
ELASTICITY QUESTIONS
1. Mr. Lopez is a butcher who recently raised the
price of steak at his market from $1.50 to $2.00
a pound. Correspondingly, his sales dropped
from 200 pounds per day to 100 pounds per
day. Figure out the elasticity of demand for
steak at Lopez’ market. Is it elastic or
inelastic?
2. At 25 cents apiece, Mr. Smith sells 100
chocolate bars per week. If he drops his price
to 20 cents, his weekly sales will increase to
110 bars. Is the demand for chocolate bars
elastic or inelastic? Prove your answer.
3. Suppose that 30 tons of coal are purchased at
a price of $20 per ton and 50 tons are purchased
at $15 per ton. What is the elasticity coefficient
in this example?
Closure
• With a Partner
come up with 5
products you
believe will have
Elastic Demand
and 5 products that
will have Inelastic
Demand:
ELASTIC
INELASTIC
ELASTIC
INELASTIC