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Warm-Up

Warm-Up. If the price of the following items were to increase/decrease significantly, would you buy more, less, or the about same amount? Why?. School lunch (decrease) Soda (increase) Nike Free Runs (decrease) Arrowhead water (increase) Laker tickets (decrease). 6 . Electricity (increase)

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Warm-Up

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  1. Warm-Up If the price of the following items were to increase/decrease significantly, would you buy more, less, or the about same amount? Why? • School lunch (decrease) • Soda (increase) • Nike Free Runs (decrease) • Arrowhead water (increase) • Laker tickets (decrease) 6. Electricity (increase) House (decrease) Plastic utensils (increase) Chanel purse (decrease) Textbooks (increase)

  2. Reading Quiz • What is the elasticity of demand? • What are the three determinants of elasticity?

  3. Elasticity of Demand Chapter 4.2

  4. Elasticity Elasticity measures the relationship between change in price and change in demand. When the price changes, how much does demand change?

  5. Elastic & Inelastic Demand Elastic Demand: Change in price = great change in demand Inelastic Demand: Change in price = little change in demand

  6. Revenue & Elasticity Knowing a product’s elasticity can help businesses to set prices to maximize revenue. Elastic goods = Prices can be cut to raise revenue Inelastic goods = Prices cannot be cut to raise revenue

  7. What determines the demand of goods to be elastic or inelastic? On the board

  8. Availability of Substitutes The greater the availability of substitutes for a good and the more similar they are, the MORE elastic the demand.

  9. Share of Consumer’s Budget The more important the item is as a share of the consumer’s budget, the greater the income effect. GREATER share of budget = MORE elastic demand

  10. Time The longer the period of adjustment, the more elastic the demand. Goods become more elastic over time because consumers need time to substitute higher priced goods with lower-priced goods.

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