RESPONDING TO PRICE
CHANGES (ELASTICITY OF
DEMAND & SUPPLY)
Lesson 2.5
The Law of Demand

The quantity demanded varies inversely with price,
other things constant (a.k.a. Price Effect)
Price =
Quantity demanded
Price =
Quantity demanded
Elasticity of Demand




Law of Demand does not specify the degree to
which the quantity demanded will change.
Degree of Change = QD vs. Price Changes
Demand is elastic if QD changes significantly as
price changes.
Demand is inelastic if QD changes little as price
changes.
Red Bull


If price of Red Bull increased from $2.00 to $2.50,
would you still purchase from the vending machine?
At what price would you change your behavior?
 This
is price elasticity – how producers and consumers
react to a change in price.
Elastic vs. Inelastic


Rubber Band – doesn’t take much effort to change its
shape. This means you are RESPONSIVE to price changes
(elasticity).
Pencil – takes much more effort to break the pencil
than to change the shape of a rubber band. This
means you are not RESPONSIVE to price changes
(inelastic).
Estimating Elasticity


Salt – no substitutes, small portion of income, and a
necessity. All of these say that SALT is considered
INELASTIC.
Sports Car – substitutes available, large portion of
your income, and a luxury item. All of these say
that a SPORTS CAR is considered ELASTIC.
Handouts



Elasticity Scenarios
Will quantity demanded be elastic or inelastic?
Which factors play a role?
Justify your decisions with sound economic
reasoning.
Demand Curves



Why do the curves look different?
Talk to those around you and determine why they
look different?
Price elasticity can be zero if someone won’t buy a
product.
 Reasons:
cultural, health, environmental, political,
moral, etc.
Inelastic Demand


Price change has little
or no effect on QD.
Line will be steep!
Elastic Demand


Price change has a
huge change on QD.
Line will be more
gradual!
Total Revenue Test


Elasticity of Demand
I will help you with the first one.
Elastic Demand
Inelastic Demand
When P in, demand decreases
When P increases, D stays the same
There are substitutes
Few substitutes for good or services
Want
Need