Elasticity 1. Price elasticity of demand is @ measure of how sensitive the demanded is to a change in price 2. Price elasticity of supply is a measure of how sensitive the ___ supplied is to a change in price The equation of price elasticity of demand coefficient is, The equation of price elasticity of supply coefficient is — If the price elasticity of demand is between 0-1 itis considered ‘a, This means that quantity demanded is__(yes or no or equal) sensitive to a change in price b. Show 6. Ifthe price elasticity of demand is between L-infinity itis considered a. This means that quantity demanded is (yes or no or equal) sensitive to a change in price b. Show 7. If the price elasticity of demand is exactly 1 itis considered This means that quantity demanded is_ (yes or no or equal) sensitive to a change in price b. Show 8. expensive good is more likely to be price _ 9. Anecessity good is more likely to be price 10. A good with many close substitutes is more likely to be price 11. Total revenue is calculated as_x. otal Revenue 2, The total revenue test says that if P Inc & TR Inc, the good is price b. The total revenue test says that if P Inc & TR dec, the good is price 12, The three influences (determinatnts] of price elasticity of supply are a . Give an example: b Give an example: _ « Give an example: 13. An inelastic supply curve means that itis hard/not hard (circle right answer) to increase Qs if the price increases. 14. An elastic supply curve means that itis hard/not hard (circle right answer) to increase Qs if the price increases. NvWorksheet on Elast Step 1- ELASTIC or INELASTIC? Price Elasticity of Demand is a measure of how responsive demand is to a change in price. If a price change leads to a considerably bigger change in quantity demanded, we would consider the good to be responsive to If, however, a similar price change leads to a much smaller change in demand, ®@ price change: hence elas we would consider it inelastic. To get a more precise measure than this of the responsiveness to a price change we can calculate a value for price elasticity of demand, We use the formula: percentage change in Q demand percentage change in price Original Number-New Number X10 Original Number PRICE ELASTICITY OF DEMAND PRECENTAGE CHANGE= Use the formula above to calculate values of Price Elasticity for all the situations below: Initial New Initia! |New: demanded | price | Demand 25 | 30 | 100 | 40 | | iz | 4/7 | 120 [a0 | | im | 200 | 220| 80 | 64 | lee : | | In each case identify whether you would describe it as elastic / unitary elastic / inelastic Step 2- ELASTIC MONEY? Different elasticity values will lead to different effects on the level of total revenue a firm receives. For ‘example, if a good Is elastic and a firm increases the price, by say 10%, they will lose more than 10% of their business, and so although they are getting more money for each one they sell, they are selling far fewer. To see the effect that elasticity has on total revenue, fll n the table below: Price | Quantity Revenue Unitial | New | Initial New | Before price change After price change | | 25 | 30 | 100 40 | i=40 [70 | 120 [50 | [a ee) 200 [210 | 0 | 6 | (as ole | 75 | 150 | 135 Has revenue increased or decreased in each case? Step 3 - What determines ELASTICITY? As we have seen above it is Important to a company to have an idea of the value of the elasticity of demand of its good or service as it will affect what happens to their total revenue as price changes. What should the ‘company aim to do with their price in each of the circumstances below? Elasticity Change in price to increase total revenue? (increase or decrease price?) | | eles | Inelastic | If the company wants to estimate the value of the price elasticity of their product, then they need to judge it against the following criteria: + Proportion of income spent on the good - the lower the proportion of income spent, the more Inelastic the good will tend to be * The number of substitutes - the more substitutes a good has the easier itis for consumers to switch to another product if the price goes up ‘+The strength of the brand - the stronger the brand, the more inelastic the product will be The level of necessity or addiction - the more necessary or addictive something is, the more Inelastic it will be Judge the products in the table below to decide whether you think they will be elastic or inelastic: Product ‘box of matches A luxury vacation Heinz’ Ketchup Computers ~ home users | Computers - business users Cigarettes | Rubber bands,Step 4- ELASTIC brands? (not band: ‘As we saw above, the strength of the brand will affect the elasticity. The stronger the brand, the more likely people are to buy it whatever the price. Draw a new demand curve on the diagram below ta show the effect of {3 major advertising campaign that strengthens the brand: Price (f) Demand ‘Quantity \We can see this effect if we consider the price of a well-established consumer product - JEANS, To see the effect, try estimating the price of @ brand name pair of jeans - say Levis, and then estimate the price of an equivalent pair of unbranded jeans (or perhaps a less well-known brand). Fill these prices in the table below: Brand/Make Price Write a short explanation (referring to price elasticity where possible) of why these different brands of jeans differ in price.4.2 Worksheet — Calculating Elasticity of demand. IL Otten Industries sells notebook computers for $800 a computer. Mrs, Otten, owner, decides to decrease the price of these computers to $750, Asa result, the quantity demanded for notebook computers rose from 500 to 550. Calculate the percentage change in price Calculate the percentage change in quantity demanded Calculate the elasticity of demand Is it elastic, inelastic, or unit elastic? Why might computers have this type of elasticity of demand? eae gE Flu vaccinations cost $19 per shot. If the industry decided to sell them for $20 a shot what do you think would happen to the elasticity of demand? Andes Central Sports, Inc. sells sports equipment. They decided to have a sale and reduce the price of their Nike shoes from $75 per pair to $50 per pair. As a result, the quantity demand rose from 100 shoes to 150 shoes. a. Calculate the percentage change in price _ b. Calculate the percentage change in quantity demanded ©. Calculate the elasticity of demand d. Isit elastic, inelastic, or unit elastic? e. Why might shoes have this type of elasticity of demand? The price of gas rose from $2.15 per gallon to $2.27 per gallon. Asa result, quantity demand went from 500 gallons per week to 495 gallons per week Calculate the percentage change in price Calculate the percentage change in quantity demanded Calculate the elasticity of demand Is it elastic, inelastic, or unit elastic? Why might gas have this type of elasticity of demand? eae Graph the following schedule and figure revenue: Demand Schedule for Desktop Computers: Quantity | Revenue Ifthe store decided to increase the price of its desktop aos 001 ia es00 computers from $825 to $900, the stores sales will fall by $700.00 7500 | how many computers? $550.00 8500, Price | Demand $7,000.00 | 5000 | $900.00 | 6000 What is the elasticity of demand? Is the price elasticity of demand elastic, unit elastic, or inelastic? Will the stores total revenue increase, decrease, or remain unchanged?