Mr. Odren
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Refers to price responsiveness
The measure of the price elasticity of demand
is how much consumers respond to a given
change in price.
Economists measure the reaction of
consumers to changes in prices
This measurement is called….PRICE
ELASTICITY OF DEMAND!!!!
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Demand is not affected by changes in price.
The good/service is a MAJOR necessity.
There are no satisfactory substitutes for the
specific good/service.
o Ex: Gasoline for automobiles.
o Regardless of the price, people still demand the same
amount of gasoline every week.
o Ex: Insulin to a diabetic. If they don’t buy it they may
die. Will pay the price of Insulin
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Mathematically, inelastic goods and services have
a price elasticity of demand that is less than 1.
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This is what an inelastic good/service looks
like when graphed…..
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Here are some examples of inelastic goods…
Salt – (small % of consumer income, few
substitutes)
Matches – (small % of consumer income)
Toothpicks – (small % of consumer income)
Gasoline –
Coffee –
Tobacco products –
Automotive transportation –
Insulin –
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A rise or fall in the price of a product GREATLY
affects the amount which people are willing to buy.
Goods that do have sufficient substitutes are
considered “elastic”.
The good and/or service is not a major necessity.
This means that if the price of an elastic good
increases too much, then consumers will purchase
a substitute good and be just as satisfied…
Example of an Elastic Good
o Meals at a restaurant
o $15.99 Chicken Alfredo at Olive Garden
o Substitute for a cheaper meal
o Cook at home
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Mathematically, elastic goods and services have a
price elasticity of demand, greater than 1.
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This is what an “elastic” good looks like when
graphed….
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Below are some examples of Elastic….
Private education –
Meals at a restaurant –
Ford cars –
Movie tickets St. Thomas vacation Fresh Tomatoes –
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1. Existence and similarity of substitutes
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2. Percentage of a person’s total budget devoted
to the purchases of that good
o More substitutes, more responsive consumers will be to
a change in price.
o Ex: Diet Coke/Diet Pepsi
o If you do not spend much of your total budget on a
particular good, you will probably not often notice
increases in the price of that good. (toothpicks, matches,
salt)
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3. Time allowed for the consumer to adjust to the
price change.
o Takes a longer time to adjust to a new price
o Longer time needed…greater price elasticity of demand
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Yes!!! Price Floor and Price Ceiling
If the government wants to establish a
minimum price for a good/service, it is called
a price floor.
If the government wants to establish a
maximum price for a good/service, it is called
a price ceiling.
Remember, U.S. not a pure Market economy,
but Mixed (Free Market AND Gov’t)
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PRICE CEILINGS
Always BELOW
equilibrium & cause
Shortage!!
What does this mean?
Keeps demand high
Benefits consumers
Producers lose
money
Ex. Rent controls for
apartments, at times
gas prices
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PRICE FLOORS
Always ABOVE
equilibrium & cause
Surplus!!
Benefits Producers
Consumers lose –
have to pay higher
prices
Ex. Agriculture crop
prices, Min. Wage law
PRICE CEILING
PRICE FLOOR
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Video clip on impact of rent control.
Is it really the most effective way to help
people afford housing?
Does it have unintended consequences?