Using a simple version of our decision rule as a point of departure demonstrate why a product demand line slopes down Identify what own price elasticity of demand measures Define elastic and inelastic demand Contrast elastic and inelastic demand Give examples of elastic and inelastic demand Explain Given two product demand graphs drawn on identical axes identify which is a more elastic demand pg 70 Product demand line slopes down because as price goes up for a product you are still getting the same marginal utility from it You are out of balance To maximize marginal utility to become balanced again you must consume less since it is an inverse The government wants to increase the tax relationship so quantity demanded goes on alcohol causing the overall price to go down up to discourage people from consuming it The government hopes that there will be an It is a measure of responsiveness of the elastic change causing a large shift in quantity demanded of a good Q to a change quantity of alcohol consumed so that less in its price p people are drinking This could lead to a Elastic means responsive when the reduction of drunk driving accidents and quantity demanded of a good responds very other crimes caused while intoxicated significantly to a change in its own price changes proportionally more than price Inelastic means not very responsive when the quantity demanded of a good does not respond very significantly to change in its own price changes proportionally less than price More elastic smaller slope changes proportionately more than price Inelastic steep slope changes proportionately less than price Elastic oranges when the price goes up the quantity demanded drops it is a luxury people do not necessarily need oranges Inelastic gasoline when price goes up quantity demanded remains relatively the same it is a necessity people need gas tot run their car and get places Explain by own price elasticity is such a big deal in the world of policy Identify and explain a private policy case representing how a firm might use own price elasticity information Public and private firms need to know the elasticity of their products because it will determine how price changes will affect quantity demanded they can then decide whether prices should increase decrease or stay the same A company that makes cars wants to know the elasticity of their product so they try increasing the price of their cars in a test market in Syracuse New York If the quantity demanded changes proportionally Identify and explain a public policy case representing how a government agency might use own price elasticity information Show graphically and describe the case of perfect elastic demand pg 71 Horizontal demand line you keep the price the same while quantity demanded goes up Show graphically and describe the case of perfect inelastic demand pg 72 Vertical demand line allows you to raise the price without losing any quantity demanded Identify which case perfectly elastic or perfectly inelastic demand you would wish for if you were going to sell a product assume ceteris paribus Explain Ceteris paribus identify which kind of good would exhibit a more inelastic a necessity or a luxury Explain Give and explain an example Interpret the expression price is no object in economic terms Explain how the number and quality of substitutes affects own price elasticity Give and explain an example You would want the demand to be perfectly inelastic because that would allow you to raise the price without losing any quantity demanded The price could constantly be increased thus increasing revenue Elasticity is a luxury because people will only pay as much as they can for a product Once the price gets too high the person won t purchase it Inelasticity is a necessity because people will pay for the product no matter the price they need the good to live For example if someone needed a life saving surgery they will have it no matter the cost because it enables them to continue living This represents inelastic demand If you need something to live you are willing to pay whatever price you have to pay for it The more substitutes there are the more flexible your choice set and the easier it is to switch away from a particular good as its own price goes up a substitute is less attractive if it is not a good substitute If there are many substitutes the demand is Explain how the time frame affects own price elasticity Give and explain an example Explain how price of the good relative to a person s wealth and income affects own price elasticity Give and explain an example Identify four factors that determine the own price of elasticity of a good or service Explain each Write out and explain the equation economists use to represent the measure of own price elasticity Explain why an absolute value sign is used in the own price elasticity equation Explain why the equation uses percentage change rather than absolute change Give an example elastic when there are no reasonable substitutes it is inelastic An example would be people using cars to get to work If the price of gas goes up people have other substitutes such as trains buses etc making transportation elastic When the time frame is short and a good is needed immediately it is inelastic because it is a necessity When a good is not needed immediately it is elastic An example would be insulin for diabetes It is needed immediately so that diabetics can live A low income is inelastic because you can only afford necessities A high income is elastic because you can afford luxuries The lower a person s income the less responsive they are to changes in price and the more inelastic demand will be An example would be a middle class person could afford gum if it went up a few cents while a child with a 10 cent allowance could not 1 Necessity v luxury elastic luxury inelastic necessity 2 and quality of available substitutes more substitutes more elastic 3 time frame more time more elastic 4 Price relative to wealth and income higher the income more elastic E QuantityChange OwnPriceChange Elastic E 1 numerator is larger Inelastic E 1 denominator is larger Perfectly inelastic E 0 change in quantity is 0 Unitary elasticity E 1 change in p change in Q The value will always be positive this is because along a given demand line price moves inversely with quantity this fraction is always negative Percentage changes gives a more accurate sense of the degree of change than an absolute measure does For example a