ELASTICITY AND INELASTICITY

Discussion question

•If a company wants to increase profit, should they increase price or decrease price? Why?

Answer

• It depends. •For instance when an electric company wants to increase profit, they simply raise their prices.

Answer (continued)

•But when an airline company wants to increase profit, they decrease their prices.

•Why the difference?

Law of Demand

•If price decrease, quantity demand will go up.

•If price increase, quantity demand will go down.

•But, the law of demand does really tell you how much that quantity will change.

Price Elasticity

•Price elasticity is the sensitivity of price to supply and demand and its ability to change as supply and demand change.

• In other words, price is not set!•Price changes depending on the current demand and supply.

Demand Elasticity• This is a situation in which demand is sensitive to price

changes. • Example: If the price of hot dog goes from $2 to $6,

demand for hot dogs will change. People will likely buy less hot dogs.

Demand Inelasticity• This is a situation in which demand is NOT sensitive to

price changes. • Example: If people have teeth cavities and are in pain,

even if the dentist raises his price from $500 to $600, demand will not likely drop.

Characteristics that Determine Elasticity

• 1) Is the product a necessity or luxury?• 2) Are there substitutes?• 3) What is the share in your budget for that good?• 4) How much time do you have to make the purchase?

• What do these mean? Elasticity and inelasticity can be different based on not only the product, but the individual.

Choose one of the following and answer the characteristic questions for yourself• Shoes• Gas• Coffee• Soft Drink• Video Games• Phone Bill

After you answered the characteristic question determine if the product you chose is an elastic or inelastic good