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Because they lack a sufficient SUBSTITUTE!!!
Economists measure the reaction of
consumers to changes in prices
This measurement is called….PRICE
ELASTICITY OF DEMAND!!!!
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Goods that lack a sufficient substitute are
considered “inelastic”.
This means that consumers must purchase
these goods/services, no matter how high
their price increases
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This is what an inelastic good/service looks
like when graphed…..
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In order for a good to be considered inelastic, it
must have a “value” of < 1…..
Here are some examples of inelastic goods…
Salt – 0.1
Matches – 0.1
Toothpicks – 0.1
Gasoline – 0.2
Coffee – 0.25
Tobacco products – 0.45
Automotive transportation – 0.2
Insulin – 0.1
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Goods that do have a sufficient substitute are
considered “elastic”.
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…
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This is what an “elastic” good looks like when
graphed….
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In order for a good/service to be considered
“elastic”, it must have a value > 1….some
examples….
Private education – 1.1
Meals at a restaurant – 2.3
Ford cars – 4.0
Fresh Tomatoes – 4.6
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Calculating Elasticity of Demand
To calculate Elasticity….
[(Q2-Q1) / ((Q1+Q2) / 2 )] / [(P2-P1) /
((P1+P2) / 2] ….see board for clarification
Q2 = QUANTITY DEMANDED AT NEW PRICE
Q1 = QUANTITY DEMANDED AT ORIGINAL
PRICE
P2 = NEW PRICE
P1 = ORIGINAL PRICE
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Calculate the price elasticity of these two
goods….
#1 Insulin
Q1 = 12 injections per week, Q2 = 14
injections per week, P1 = $20.00 per
injection, P2 = $10.00 per injection
Elasticity = -.23
Always take the absolute value = .23
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Calculate the price elasticity of ORANGE JUICE
PREDICTIONS? INELASTIC OR ELASTIC?
Q1 = 1 QUART PER WEEK
Q2 = 3 QUARTS PER WEEK
P1 = $2.50
P2 = $2.25
PRICE ELASTICITY = 9.52
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Yes!!!
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.
PRICE CEILING
PRICE FLOOR
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PRICE CEILINGS
Always BELOW
equilibrium
Enacted to create
shortages
What does this mean?
Keeps demand high
Benefits consumers
Producers lose
money
Ex. Rent controls for
apartments
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PRICE FLOORS
Always ABOVE
equilibrium
Enacted to create
surpluses
Benefits Producers
Consumers lose –
have to pay higher
prices
Ex. Agriculture