Applying Demand and Supply:The Concept of

ELASTICITY

So far…

Furthermore…

So…

• Qd/Qs does change as P changes

BUT…

• BY HOW MUCH does it change?

• Should I raise/lower my price? How much more or less will people buy?

• Will I make more $ or lose $ ?

• Will an increase in price make enough additional $ to offset the drop in Qd?

• Will a decrease in price increase Qd enough to offset the lower price per unit?

• How responsive is Qd to a change in price?

“Elasticity”

• Def’n: measures how responsive demand or supply quantities are to a given change in price

• Elasticity Coefficient : a numerical indicator (calculated) of the strength and type of elasticity

• used to indicate whether revenues will rise/fall in response to a price change

Case #1:Price Elasticity of Demand

• Aka Ed (coefficient of demand elasticity)

• How responsive is Qd (and R) to a change in price?

• Is Price really important or not important at all in influencing how much you will buy?

• Price very important = “elastic” demand (price elastic)• Price not important = “inelastic” demand (price

inelastic)

Factors Influencing Ed :

What makes the demand for a product/service more elastic or more inelastic?

a) Necessity vs. Luxury Good ?b) Few vs. Many Substitutes ?c) Little vs. Lots of Time to Compare ?d) Large vs. Small % of Budget?

• In short, HOW BADLY do you need this item? Enough to overlook the price change… ?

Next Step… Calculating Ed’s