1. Price Elasticity of Demand

2. Which of the products below would be affected a lot by a change in price and which ones would be impacted a little? heart transplant Snickers candy bar tomatoes salt Cars (short run) gasoline Cars (long run) Affected by price changes Slightly affected by price changes

3. Determine the price elasticity of demand for the diagram below, assuming that $6 was our initial price. Is this elastic or inelastic? Quantity Demanded D $6 100 $3 140 Total Revenue

4. Elasticity Price ($) Quantity Demanded D 10 5 20 Now determine the PED for this diagram, Assuming that we started at $7. Evaluate whether or not the company should have raised its prices. 7

7. Elasticity The Formula: Ped = % Change in Quantity Demanded ___________________________ % Change in Price If answer less than 1: the relationship is inelastic If the answer is greater than 1: the relationship is elastic

9. Elasticity Price (£) Quantity Demanded The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded.

10. Elasticity Price Quantity Demanded (000s) D The importance of elasticity is the information it provides on the effect on total revenue of changes in price. £5 100 Total revenue is price x quantity sold. In this example, TR = £5 x 100,000 = £500,000. This value is represented by the grey shaded rectangle. Total Revenue

11. Elasticity Price Quantity Demanded (000s) D If the firm decides to decrease price to (say) £3, the degree of price elasticity of the demand curve would determine the extent of the increase in demand and the change therefore in total revenue. £5 100 £3 140 Total Revenue

12. Elasticity Price (£) Quantity Demanded 10 D 5 5 6 % Δ Price = -50% % Δ Quantity Demanded = +20% Ped = -0.4 (Inelastic) Total Revenue would fall Producer decides to lower price to attract sales Not a good move!

14. Elasticity Last year, the price for tuition at a state university increased by 14%. As result of the price hike, the university saw an 8% drop in student enrollment. EVALUATE whether the university should raise prices, or lower prices next year if it would like to generate more revenue? Do this on your own. If you try to help someone around you, you will lose points for your class.

15. Elasticity The price of product X has gone up from $2 to $3. As a result, the quantity demanded for product Y has gone up from 40 to 80. 1. First, graph this change on a demand diagram. 2. Determine the Cross Elasticity of Demand. 3. Explain whether products X and Y are complements or substitutes? How do we know? 4. Are these two goods elastic or inelastic? You may work together in your groups on this.