Elasticity of Demand, price ceilings, price floors

1. Elasticity of Demand, price ceilings, price floors Mr. Odren

2. Price Elasticity of Demand • 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!!!!

3. Inelastic Demand • 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. • Ex: Gasoline for automobiles. • Regardless of the price, people still demand the same amount of gasoline every week. • Ex: Insulin to a diabetic. If they don’t buy it they may die. Will pay the price of Insulin • Mathematically, inelastic goods and services have a price elasticity of demand that is less than 1.

4. Graphing Inelastic Demand • This is what an inelastic good/service looks like when graphed…..

5. Values of Inelastic goods/services • 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 –

6. Elastic Demand • 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 • Meals at a restaurant • $15.99 Chicken Alfredo at Olive Garden • Substitute for a cheaper meal • Cook at home • Mathematically, elastic goods and services have a price elasticity of demand, greater than 1.

7. Graphing Elastic Demand • This is what an “elastic” good looks like when graphed….

8. Values of Elastic goods/services • Below are some examples of Elastic…. • Private education – • Meals at a restaurant – • Ford cars – • Movie tickets - • St. Thomas vacation - • Fresh Tomatoes –

9. What determines price elasticity of demand? • 1. Existence and similarity of substitutes • More substitutes, more responsive consumers will be to a change in price. • Ex: Diet Coke/Diet Pepsi • 2. Percentage of a person’s total budget devoted to the purchases of that good • 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) • 3. Time allowed for the consumer to adjust to the price change. • Takes a longer time to adjust to a new price • Longer time needed…greater price elasticity of demand

10. Can the government place limits on pricing? • 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)

11. COMPARISON • PRICE FLOORS • Always ABOVE equilibrium & cause Surplus!! • Benefits Producers • Consumers lose – have to pay higher prices • Ex. Agriculture crop prices, Min. Wage law • 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

12. Graphical view PRICE CEILING PRICE FLOOR

13. Video Clip • Video clip on impact of rent control. • Is it really the most effective way to help people afford housing? • Does it have unintended consequences?