Baby chicks 10 47 41 10 47 41 Bentley the hedgehog The Elasticity of Demand and Consumer Surplus Why life is worth living Or is it Big ideas Consumer surplus is the extra pleasure you get over and above the price of commodities It makes life worth living The elasticity of demand reflects how much consumption falls if prices rise or vice versa The elasticity of demand reflects both need and how easy it is to replace a product Capitalists try to turn consumer surplus into profits by raising prices without losing sales They need to reduce demand elasticity Puppies make us happy I like dogs because they give me more pleasure than I lose by paying for them Consumer surplus the extra pleasure we get from consuming No surplus on the last or marginal purchase Last unit price MU We pay just as much as our pleasure Surplus only from inframarginal purchases before the marginal purchase Buy until MU price You get no net pleasure from the last unit because MU price MU diminishes Therefore before the last MU price for previous inframarginal items This is surplus It is the inframarginal that makes you happy You get consumer surplus from every purchase up to the final one Beer MU Price Surplus MU price Cumulative Surplus 1 15 1 25 13 75 13 75 2 10 1 25 8 75 22 5 3 6 1 25 4 75 27 25 4 3 1 25 1 75 29 5 2 1 25 0 75 29 75 6 1 25 1 25 0 29 75 7 0 5 1 25 0 75 29 8 0 25 1 25 1 28 9 0 1 25 1 25 26 75 When I buy wine I buy until the last glass is just worth the cost This means that until then each gives me more pleasure than it cost This is surplus Surplus falls on additional purchases Because of diminishing marginal utility of course You knew that 10 47 42 How much surplus will you get if the price of wine is 5 glass Glass Your Marginal Utility 1 10 2 5 3 4 4 2 5 1 1 10 2 5 3 0 4 I have no idea How to find total surplus First figure out how many glasses you will buy Buy until MU price or 2 glasses Then figure out how much surplus on each glass you buy or MU price On first glass MU price 10 5 5 On second glass MU price 5 5 0 Total 5 0 5 The Elasticity of Demand is the relative change in quantity demanded for a change in price The elasticity is the percentage change in quantity divided by the percentage change in price This tells you how responsive demand is to price changes That is inelastic demand Some people would keep their puppies at any price Demand elasticity depends on two things Can you do without the service Could you live without puppy love 10 47 43 Can you find another source if the price rises I need gas but I could get it from another gas station High and low demand elasticity Price Inelastic demand large change in price small change in quantity Elastic demand large change in quantity for a small change in price Quantity Necessities don t necessarily have inelastic demand Highly elastic demand It is easy to stop buying when prices rise Consumers either do without or they find another way to get it Inelastic demand It is hard to stop buying even when prices rise Consumers can t do without and they can t find another way to get it It is not only about whether you need the product The elasticity of demand for Dunkin Donuts may be low even though you don t need donuts because almost no one else makes good donuts The elasticity of demand for penicillin from Merck is high even though it may save your life because others make penicillin and there are other antibiotics Henions in downtown Amherst has the best donuts Fresh baked every morning go there after class Which is better for you 1 Puppies 2 Penicillin 3 Donuts This is very silly Companies want inelastic demand Then they can raise prices and increase profits without losing sales They try to make you think you need their product and to distinguish theirs from their rivals Some things come in inelastic demand because they are distinct even unique Demand elasticity depends on how important things are And whether you can substitute for them Dispensable Will buy something else at higher prices Essential Will keep buying even at higher prices Two ways to reduce elasticity of demand Make people think that life without the product is not worth living Reduce alternative sources of supply Harass and destroy the competition Advertising is about persuading you that you need things 10 47 44 They would have you think that their product and only their product will make you sexy and happy Sometimes they have it wrong 10 47 44 Created scarcity is the key to power and profit Make your product special unique and you reduce the elasticity of demand allowing you to raise prices and profit Ways to create scarcity 1 Branding create a reputation for quality 2 Control access to technology 3 Control access to essential resources Capitalism is about profit not use value Companies want little monopolies with low elasticity of demand They brand name and grab resources and technology to restrict consumer choices Trademarks patents restrictive labor contracts land grabs Microsoft the RIAA the drug companies all do this to increase profits Evil Artificial scarcity allows companies to milk the consumer surplus Consumer surplus makes life worth living It is the extra value you get from consumption beyond what you pay It is the value from your inframarginal purchases By raising prices artificial scarcity reduces consumer surplus and makes you less happy Even unhappy So down with artificial scarcity Down with monopoly profits Take away points Consumer surplus is the extra pleasure you get over and above the price of commodities The elasticity of demand tells how much you will reduce consumption if prices go up or how much more you will buy if prices fall The elasticity of demand reflects how much you need the product and how easy it is to find substitutes Capitalists try to turn surplus into profits by raising prices To do this they need to lower the elasticity of demand by reducing substitution and competition