DEMAND AND THE LAW OF DEMAND

• Topics Covered:
• Demand
• Determinants of Demand
• Law of Demand
• Demand Curve
• Demand Schedule
• Elasticity of Demand
Defining Demand
⬥ Demand – desire, ability, and willingness to buy a good/service
■ The amount of a product that a consumer (individual) or group of
consumers (market) will purchase at a given price
■ Microeconomics – The study of the economic behavior and
decision making of small units, such as individuals, families, and
firms (businesses)
Law of Demand
•Law of Demand –prices are lower,
consumers will buy more; prices QD
are higher, consumers will buy less.
P
•Inverse relationship between
price and the quantity
demanded (QD) of a product. QD
•Prices influence the amount of P
something that we are willing to
purchase.
Change in the Quantity Demanded

$3.50 $1.00
⬥ Notice how Homer Simpson changes the amount he purchases based on
the price.
The Income Effect
⬥ Income Effect – the change in consumption resulting from a change in
price, “more bang for your buck”
■ Consumers feel richer when prices drop, poorer when prices rise. Both

affect the Quantity Demanded (QD) of a product.

$44.50 ×0
Express is a company that offers brand-named clothing “When the price is high, some consumers don’t want to buy”
The Income Effect

$44.50 $19.50 × 6
“When the price is low on Express clothes, more consumers will have an incentive to buy”
The Substitution Effect
⬥ Substitution Effect – when consumers react to an increase
in a good’s price by consuming less of one good and more
of other goods

$.50 $1.75 $.50

“When the price is high for one good, consumers
will often substitute it for another similar good”
 The Demand Schedule
⬥ Individual Demand Schedule - a table that lists the quantity of a good that an
individual will purchase at each price in a market
⬥ Market Demand Schedule - lists the quantity of a good that all consumers will
purchase at each price in the market
Price of Ice Quantity Price of Ice Quantity
Cream Demanded Cream Demanded
$3.00 0 $3.00 0
2.50 2 2.50 30
2.00 4 2.00 50
1.50 6 1.50 100
1.00 8 1.00 200
.50 10 .50 300
.10 12 .10 400
Individual Market
 The Demand Curve
• Plot the points of the following schedule on the graph
▪ Demand Curve - graphically represents the demand schedule
▪ Demand Curve is downward sloping because of the law of demand
Price
Price Quantity
Demanded
$3.00 0

2.50 2

2.00 4

1.50 6

1.00 8

.50 10

.25 12
D
Quantity
Demand Curve Assignment
Teacher Instructions
1. For the next slide, instruct the students to imagine their favorite bottled beverage (i.e.
water, coke, Gatorade, etc.)
2. Next, tell them to complete the demand schedule based on their likelihood to purchase
these drinks based on the prices ($.25-3.00)
3. After completing the demand schedule, instruct them to graph their individual demand
curve.
4. Once they have completed their own individual demand schedule and curve, tell them
to compile the market demand for bottled beverages. Tell them choose 5 of their
classmates and collect their data.
5. Finally, tell the students to graph the market demand for the bottled drinks.
Demand Curve Assignment
Directions
1. Imagine your favorite bottled beverage (i.e. water, coke, Gatorade, etc.)
2. Next, complete your own personal demand schedule based on your likelihood to purchase your favorite
drink based on the price points listed below ($.25-3.00).
3. After completing the demand schedule, graph your individual demand curve.
Price Bottles Bought Price
Per Week
3.00
2.50
2.00
1.50
1.00
.50
.25

Quantity
Demand Curve Assignment
Directions
1. Now, choose 5 of your classmates and collect their data.
2. Finally, graph the market demand for the bottled drinks.

Price Student Student Student Student Student Totals

Price
1 2 3 4 5
3.00

2.50

2.00

1.50

1.00

.50

.25

Quantity
Demand Curve Assignment
Directions *Sample schedule and graphs*
1. Imagine your favorite bottled beverage (i.e. water, coke, Gatorade, etc.)
2. Next, complete your own personal demand schedule based on your likelihood to purchase your favorite
drink based on the price points listed below ($.25-3.00).
3. After completing the demand schedule, graph your individual demand curve.
Price Bottles Bought Price
Per Week
3.00 0

2.50 1

2.00 2

1.50 3

1.00 5

.50 10

.25 20 D

Quantity
Demand Curve Assignment
Law of Demand, Inversely related
• Explain why the curve is downward sloping. ____________________________
• Give an example of a time that you experienced the income effect
• Give an example of a time that you experienced the substitution effect
Demand Schedule is a table that lists the quantities of a good/service a person will
• A __________________
buy at each price that may be offered in the market.
• A Market Demand Schedule is a table that lists the quantities of a good/service all
_____________________
consumers will buy at each price that may be offered in the market.
Demand Curve
• A ________________ is a graphical representation of a demand schedule
Income
• The __________ effect is the change in consumption resulting from a change in price,
which affects a person’s purchasing power
Substitution effect is the change in consumption resulting from a change in price
• The ____________
of a related product, when a person can replace one item with another.
Summarizer - Demand
▪ List the last five goods or services you recently purchased and the amount
you spent on each. What led you to buy each one?
Item Purchased Price Reason for Purchase
I really wanted to see the new Spiderman movie.
1. Example: Streaming Movie $19.99
I heard it was an amazing movie.

2.

3.

4.

5.
LEARNING INTENTION AND SUCCESS CRITERIA

LEARNING INTENTION

• I know what causes the demand curve to shift.

SUCCESS CRITERIA

● I can illustrate/graph a shift of the demand curve.

● I can describe the determinants of demand that cause the demand
curve to shift.
 Activator – Analyzing the Demand Curve
• Imagine the individual who enjoys Designer brand clothing. Why does his demand curve slope downward?
Price (P)
a
$44.50 alo Mo
ng vem
th en
ec t
ur
ve

b
$19.90

0 6 Quantity
Demanded (QD)
*The demand curve slopes downward to reflect the consumer’s willingness to buy when the price falls on shirts, from $44.50 to $19.90*
 Movement Along the Demand Curve
• Movement – is caused by a change in the price of a product
• Changes the quantity demanded of a product, ceteris paribus
P P
b
a
$100 $100

a
$10 b
$10
D D
10 100 QD 10 100 QD

*High prices will cause a *Low prices will cause an

reduction in the QD* increase in the QD*
“Ceteris Paribus” – all things remaining the same, constant

*Analyzing demand is just a moment in time, which is like a

Polaroid picture (if you lived in the 80’s), or a Snapchat post (a more modern reference)*
Reflection Question: Refer to the individual who enjoys designer clothing. What
could change in his life that might affect his demand for designer clothing?

Increase in Income
Having a Child

Buying a different brand

*Each of the above factors might impact his ability to purchase more or less of his favorite brands*
How has his demand changed and how does this affect his demand curve?

Demand for children products rises

D D1

More stuff for his child

Demand for designer clothing falls

D1 D
Less stuff for himself
Shifts of the Demand Curve
Price
⬥ Changes in demand
Increase
are reflected as a shift in demand
in the curve
⬥ Shifts to the right
indicate an increase in Decrease
demand in demand

⬥ Shifts to the left

indicate a decrease in
D2 D D1
demand
Quantity
“to the left, to the left…(bad)” Demanded

“to the right to the

right…(good)”
Consumer Income: Inferior Goods
⬥ Consumer Income – The amount of money a consumer has can
affect their willingness to purchase certain items.
■ Examples:
● Normal good – Express For Men clothing (Name Brand)
● Inferior good – Walmart Brand clothing (Generic Brand)

Faded Glory = Inferior Good Express = Normal Good

Increase in Consumer Income
P

D D D1

QD
P

D D D
1
QD
*When consumer income is up, they will buy more normal goods, and less inferior goods.*
Decrease in Consumer Income
P

D D
D
1 QD

D D D1
QD
*When consumer income falls, they will buy more inferior goods, and less normal goods.*
Example of Normal and Inferior Goods

Normal Good Inferior Good: Generic

*Captain Crunch would be considered a normal good, or name brand.*
Price of Related Goods
⬥ Price of related goods – demand for goods can be affected by the
price for related goods
■ Examples:
● Complements – iPhone and Case
● Substitutes – iPhone and Galaxy
DEMAND: Complementary Products
P M
ov
em
en

P QD
ta
lo
ng

D
QD

P Shif
t

D D D
1 QD
*Price of a related good falls, complementary products increase in demand*
DEMAND: Substitute Products
P M
ov
em
en

P QD ta
lo
ng

QD

D D D
1
QD
*Price of a related good rises (iPhone), substitute goods (Samsung) experience an increase in demand*
DEMAND: Consumer Tastes
⬥ Consumer Tastes – changes in popularity changes the “dollar
vote” of the consumer
■ Examples:
● Popularity decreases - 80’s band Poison, low demand
● Popularity increases – Drake, high demand
Consumer Tastes
P

D D
1
D
QD
P

D D D
1QD
*Consumer tastes often drive demand. As tastes change, so does demand.*
DEMAND: Consumer Expectations
⬥ Consumer Expectations – the way people anticipate changes in
products, technology or the economy
■ Examples:
● iPhone models
● Changes in body styles of cars

2012 Tesla Model S 2022 Tesla Model S

Consumer Expectations
P

D D D
1
QD

D D D1
QD
*If consumers expect a new model to be released, they will often reduce their demand for the old model*
Number of Buyers (Population)
⬥ Population – an increase/decrease in the number of consumers
■ Examples:
● Increase in population – Super Bowl weekend, Olympics
● Decrease in population - Detroit, loss of 1 million people

Abandoned Detroit Super Bowl

Number of Buyers (Population)
P

D D D1
Increase in population during Olympics QD

D D
1
D
Decrease in population after Olympics QD
Demand vs. Quantity Demanded
▪ Quantity Demanded (Movement) - A change in the amount a consumer will purchase as a result of
a change in price
▪ Ceteris paribus – all other things constant, all things remaining the same
▪ Reflected as movement along the curve
▪ Demand (Shift) – A change in the amount a person will buy as a result of an outside factor (change
in ceteris paribus - popularity of product, consumer income, etc.), not having to do with price
▪ Reflected as a shift P P
a a
$100 $100

$10 b $10 b
D D
10 100 QD 10 100 QD
P QD D
Demand Determinant Videos
• Turtle Soup
– https://www.youtube.com/watch?v=-3CJ4uvma10&list=PL0DA79056AA8D6911&index=6&t=1s
• Floyd Mayweather
– https://www.youtube.com/watch?v=M5Y60efBJ_M&list=PL0DA79056AA8D6911&index=20
• Gas Prices and Hybrids
– https://www.youtube.com/watch?v=0F4-w0FX3Yk&index=11&list=PL0DA79056AA8D6911
• Population Decline
– https://www.youtube.com/watch?v=RFnu-7fqmXU&index=19&list=PL0DA79056AA8D6911
• Remembering the 2000’s
– https://www.youtube.com/watch?v=CeJW5_iu8iQ&index=14&list=PL0DA79056AA8D6911
Summarizer – Demand vs. Quantity Demanded
▪ Determine whether each of these events would cause a change in demand
or a change in the quantity demanded of a good.
Item Purchased Demand or Quantity Demanded

1. A computer company lowers it prices for their Quantity Demanded

computers.

2. Nike convinces high schools that their jerseys are

superior to other jersey companies, such as Adidas.
Demand
The high schools begin purchasing jerseys from Nike.

3. A cold snap renders the oranges in Florida

useless as the crop is ruined. People turn to Demand
apples as a substitute product and begin
purchasing apples.
LEARNING INTENTION AND SUCCESS CRITERIA

LEARNING INTENTION

• I know what causes the demand curve to shift.

SUCCESS CRITERIA

● I can illustrate/graph a shift of the demand curve.

● I can describe the determinants of demand that cause the demand
curve to shift.
Application Question
• Think of a normal good that you own or typically purchase and list it in the table
below. Now think of an inferior good to your normal good and list it in the table
below. Explain why you consider the goods in your table normal or inferior.

Normal Good Inferior Good Explanation

or or or
Application Questions: The Determinants of Demand
• Provide an original example for each of the following determinants of demand.

Consumer Tastes Expectations Related Goods Population

Income
Demand Application Assignment
1. How did the income effect influence her purchases?
• She felt richer like she had more “bang for her buck”.

2. How did the substitution effect apply to this scenario?

• Substituted Abercrombie for Hollister.
Demand Application Assignment
Price Per CD QD Pric
e
$20 1

12 3

10 5
D
5 10

Quantity
a. Which way is the curve sloping? Explain why. Demanded
Downward. Inverse relationship b/w p and qd

b. Is a price change reflected as movement along the curve or a shift in the curve? What is the difference?
Movement. Change in price causes a change in QD. Change in demand is represented by a shift.
Demand Application Assignment
Price Per QD during QD during
Shirt school year summer
Pric
$45 1 2 e

25 2 4

20 3 6

15 5 10 D D1
10 8 16
Quantity
Demanded
a. Which way did the curve shift when he increased his hours over the summer? To the right.
b. What allowed him to increase his consumption of Express for Men shirts? More hours led to more income.
c. What does the shift in the curve indicate in this scenario? Increase in demand.
Demand Application Assignment
Pric
e
Price of QD of ice QD after QD after
ice cream cream salsa being fired
sprinkles ad
$10 2 3 0
5 4 5 2
D2 D D1
3 8 9 3

Quantity
a. What initially made her interested in Guacamole Ice Cream? Advertisement on C-Span.
b. Demanded
Which way did the curve shift after Publix ran the ad for free Salsa flavored sprinkles; what does a shift in that direction
show? Right. Increase in demand.
c. How might the ad for free Salsa affect the market demand for Guacamole Ice Cream? Increase in the market demand.
d. Which way did the curve shift after her job was terminated; what does a shift in that direction show?
Left. Decrease in demand.
e. Which of the determinants of demand were utilized in this scenario?
Income, price of related goods (complement), tastes, expectations.
Demand Application Assignment
Pric
e
Price of QD of ice QD after QD after
ice cream cream salsa being fired
sprinkles ad
$10 2 3 0
5 4 5 2
D2 D D1
3 8 9 3

Quantity
a. What initially made her interested in Guacamole Ice Cream? Advertisement on C-Span.
b. Demanded
Which way did the curve shift after Publix ran the ad for free Salsa flavored sprinkles; what does a shift in that direction
show? Right. Increase in demand.
c. How might the ad for free Salsa affect the market demand for Guacamole Ice Cream? Increase in the market demand.
d. Which way did the curve shift after her job was terminated; what does a shift in that direction show?
Left. Decrease in demand.
e. Which of the determinants of demand were utilized in this scenario?
Income, price of related goods (complement), tastes, expectations.
LEARNING INTENTION AND SUCCESS CRITERIA

LEARNING INTENTION

• I know how to illustrate the demand curve on a graph.

• I can illustrate and analyze the cause of shifts in the curve.

SUCCESS CRITERIA

● I can solve graphing problems related to the demand curve.

● I can solve graphing problems that represent shifts in the demand
curve.
Problem Sets– Graphing Demand

1. When the price of a case is $10, what is the quantity demanded? 100
________
600
2. When the price of a case is $5, what is the quantity demanded? _________
3. As the price of a case decreases does the quantity of cases demanded increase or decrease?
Increase
_____________________
Movement
4. This change in the quantity demanded causes a ______________________ along the demand curve.
Problem Sets– Graphing Demand

D D1

1. Provide a reason why customers might be willing to purchase more iPhones for the same price.
Increase in income
___________________
2. Right
When demand increases at all price levels, which way does the demand curve shift? _________
Problem Sets– Graphing Demand

D D1

a) How was the original demand curve for the Samsung affected by the increase in price of the iPhone?
People substituted the iPhone for the Samsung and the demand curve shifted right.
__________________________________________________________________________________
b) Name one reason that Samsung might increase the demand for their product without changing the
Advertising campaign to increase demand for their phones.
price__________________________________________________________________________
Problem Sets– Graphing Demand

a) 150
How many would consumers be willing to buy at $0.30? ____________
b) 50
Other things constant, how many would the buyers be willing to purchase if the price increased to $0.40? __________
c) Change in QD
Would this cause a change in demand or quantity demanded? _______________
d) Movement
Would this cause a movement along the curve or a shift in the curve? ___________
Problem Sets– Graphing Demand

D
D1

a) Comparing the new demand curve (D2) with the original demand curve (D1), Which way did the demand curve
Left
shift?_____________
Smaller
b) Does this shift indicate that consumers are willing to buy a smaller or larger quantity of songs? ___________________
Decrease
c) Did this cause an increase or a decrease in demand? ________________
Problem Sets– Determinants of Demand
Consumer Income
a. Create a scenario for when income falls the demand for a normal good falls, but the demand for an inferior good rises
When I return to school I lose my summer job, I am not able to buy brand named clothes.
i. Normal Good____________________________________________________________________

When I return to school I lose my summer job, I buy knock-off clothes.

ii. Inferior Good____________________________________________________________________

D1 D D D1
Problem Sets– Determinants of Demand
Price of Related Goods
a. Create a scenario where a fall in the price of one increases the demand for its complementary good(s).

When the price of the iPhone falls, people buy more cases
i. Complement ______________________________________________________________

D D1
D
Problem Sets– Determinants of Demand
Substitutes

Create a scenario where an increase in the price of one good causes people to substitute it for another good, thus

increase the demand for the substitute good.

When the price of the iPhone rises, people buy more Samsung’s
i. Substitutes ______________________________________________________________

a
D D1
Problem Sets– Determinants of Demand
Consumer Tastes

a. List items that have increased/decreased in popularity and seen an increase/decrease in demand

Hoverboards
i. Popularity Increase ______________________________________________________________
Rollerblades
ii. Popularity Decrease ______________________________________________________________

D1 D1
Problem Sets– Determinants of Demand
Consumer Expectations

a. List a scenario where the expectation of the future could affect the demand for a product today and how the demand

I expect the price of meat to double

will be impacted in the future _________________________________________________________________________
tomorrow.

D D1 D1 D
Problem Sets– Determinants of Demand
Population (Number of buyers)

a. Give a scenario where increases/decreases in population can affect demand

Population increases during the Super Bowl or Olympics.

i. Population Increase _____________________________________________________________
Population has fallen in Detroit.
ii. Population Decrease _____________________________________________________________

D
D D1 D1
 Problem Sets– Determinants of Demand
•Choose a market (i.e. clothing, smartphone, tablet, food, etc.). Create your own headline, which would shift the curve to the right or
left for each of the following determinants. Then list the direction that the curve would shift.
Headline Determinant of Demand Curve Shifts, Right or Left

1. Example: Over the summer, I can work more hours at Consumer Income
Shift to the Right
McDonalds. I earn more money over the summer.
2. Consumer Tastes

3. Consumer Expectations

4. Population (Number of Buyers)

5. Price of Related Goods

Problem Sets– Determinants of Demand

Analysis of the Cell Phone Market

*B is original curve*
Headline Demand Does the curve Increase/Decre New Determinant(s) of
Shift? (Y/N) shift Left/Right? Or ase in Demand, Curve Demand (Income,
did it cause or Change in (A or Population, Price of
movement along Quantity C), or Related Product,
the curve? Demanded? N/A. Expectations, Tastes) or
Not Applicable.
1. US tourism doubles in the current Yes Right Increase C Population
year.
2. The price of a cell phone triples. No Movement QD N/A N/A (price)
3. Consumer Income for U.S. consumers Yes Left Decrease A Income
falls for 3rd straight quarter.
4. Cell Phones are shown to cause brain Yes Decrease Tastes/Expectations
Left A
injury.
Problem Sets– Determinants of Demand
Analysis of the Cell Phone Market
*B is original curve*
Headline Demand Does the curve shift Increase/Decrease New Determinant(s) of Demand
Shift? (Y/N) Left/Right? Or did it in Demand, or Curve (A (Income, Population, Price
cause movement along Change in Quantity or C), or of Related Product,
the curve? Demanded? N/A. Expectations, Tastes) or
Not Applicable.
5. Price of Cell Phones to double next
month Yes Right Increase C Expectations
6. Price of Cell Phones to fall next month
Yes Left Decrease A Expectations
7. The Price of a cell phone falls by 25%
No Movement QD N/A N/A (price)
8. $100 dollars of free iTunes with the
purchase of a new cell phone
Yes Right Increase C Related goods
 Problem Sets– Shifts vs. Movement
• Scenario: You go to your favorite burger place. The price of a burger has increased from $5 to $10. You used to buy 5 burger per week at $5 dollars, but
now you don’t buy any. Also, the price of chicken sandwich stays the same. To you, burgers and chicken sandwiches are perfect substitutes.
– How will the increase in the price of a burger affect the purchase of burgers? Will it cause a change in the demand or quantity demanded?
It will cause a reduction in the quantity demanded for the burgers.
_____________________________________________________________
– Will it cause a shift in the curve, or movement along the curve?Movement along the curve.
____________________________________
– How will the increase in the price of a burger affect the purchase of chicken sandwiches? Will it cause a change in the demand or quantity
demanded? The demand for chicken sandwiches will increase.
___________________________________________________
– Will it cause a shift in the curve, or movement along the curve?Shift in the demand curve to the right.
______________________________________

D D D1

• When prices fall people experience the income effect. Explain how the income effect applied to this situation.
In this case, the price increase caused people to purchase less burgers along their existing demand curve.
______________________________________________________________________________________________________________
People were able to substitute their demand of burgers to chicken
• Describe how the substitution effect applied to this situation. __________________________________________________________
sandwiches.
Problem Sets – Demand

Determinant of demand Demand increases or Shift in which direction

decreases? (left or right)?
1. Population increases
Increase Right
2. Population decreases
Decrease Left
3. Increase in most people's income
Increase Right
4. Decrease in most people's income
Decrease Left
5. Price of Samsung (substitute) increases
Increase Right
6. Price of HTC (substitute) decreases
Decrease Left
Problem Sets – Demand

Determinant of demand Demand increases or Shift in which direction

decreases? (left or right)?
7. Price of Case (complementary) good increases
Decrease Left
8. Price of Cell Phone Service (complimentary) good
decreases
Increase Right
9. Product becomes extremely popular (change in
Increase Right
taste of buyers)
10. Product now out of fashion (change in taste of
Decrease Left
buyers)
11. There is an expectation that the price of the
product will soon fall
Decrease Left
12. There is a fear that the economy will go into a
recession where many firms will fail, and Decrease Left
unemployment will increase
Summarizer: Flow Chart – Determinants of Demand

An individual gets an If an individual Return of soldiers Bell-bottomed Snowboards will

increase in income. expects price of the from WW2 led to a jeans were at one experience an increase
Increase in demand for bike to rise in the baby boom, which time very popular. in demand if the price
name brand products; future, their demand increased demand for of skis goes up, making
decrease for generic. will increase today. baby products. the two goods
substitutes.

An individual’s income If an individual If a population Any product that Ski boots are
goes down. Decrease expects the price of decreases, then their goes out of style considered
in demand for name the bike to go down will be a decrease in can be affected by complements for skis.
brand products; in the future, then demand for housing, consumer tastes If Ski boots are too
increase in demand their demand will automobiles, food, etc. and a decrease in expensive, demand for
for generic. decrease today. demand. skis will decrease.
LEARNING INTENTION AND SUCCESS CRITERIA

LEARNING INTENTION

• I can identify the difference between elastic and inelastic

demand.

SUCCESS CRITERIA

● I can identify products and indicate how they might exhibit

inelastic or elastic demand.
Activator - Elasticity of Demand
1. List an item that you would buy less of if the price increased.
Example: Fast food
2. List an item that you would buy more of if the price decreased.
Example: Name brand shoes
3. List an item that you would continue to buy, even if the increased.
Example: Gasoline
Elasticity of Demand
⬥ Elasticity of Demand –how consumers will cut back or increase their
quantity demanded for a product when prices rise or fall
■ Measures the extent to which changes in price causes changes in the

quantity demanded.
■ Helps determine how much a price change will influence the quantity

demanded of any given product

Elasticity of Demand
P P
P2 P2

P1 P1
D D
0 0
QD QD

*The slope of the curve helps us to determine if the response is elastic or inelastic*
Elasticity of Demand
⬥ Elastic – consumption changes drastically when a price rises or falls
■ A consumer is very responsive to price changes
Elastic Demand Curve
P
$1.7 Mill.

40,000

10,000
D
0 10 10,000 QD

*A fall in price of a luxury automobile would have an enormous

impact on the quantity demanded*
Inelastic Demand
⬥ Inelastic - changes in price cause a relatively small change in quantity
demanded
■ Consumers continue to purchase regardless of the price change

Table salt Insulin Gasoline

Inelastic Demand
P

$3.00

1.50

.50

D
0 2 3 QD

*A drop in price for this product would cause a relatively small increase in
the quantity demanded.*
Determinants of Demand Elasticity
1. Need vs. a Want
• Medicine versus a luxury automobile
2. Availability of Substitutes
• Pepsi/Coke, Butter/Margarine
3. Importance of the Product
• How much you spend on a good
• Table salt versus designer clothes
4. Time Horizon
• Longer time horizon – more elastic
• Gas in the short run is inelastic, but over time elastic
Summarizer - Elasticity Application
Directions: Indicate for each of the following whether the product will be inelastic or elastic and list the
determinant to explain why.

Item Elastic/Inelastic Determinant

Insulin for a diabetic Inelastic Need/No Available Substitutes
Heinz 57 Tomato Sauce
Elastic Want/Available Substitutes
Food
Inelastic Need
Polo Brand Clothing Elastic Want
Cigarettes Inelastic Need
Summarizer - Elasticity Application
Elastic Products Inelastic Products
Values of Elasticity
⬥ Elasticity has a precise mathematical definition
■ Percentage change in quantity demanded

Percentage change in price

⬥ Value is less than 1, it is considered inelastic.
■ Inelastic = Less than 1

⬥ Value is greater than one, demand is elastic.

■ Elastic = greater than 1

⬥ Value is equal to one, demand is unitary elastic.

■ Unitary Elastic = equal to 1
Computing the Price Elasticity of Demand

⬥ Price elasticity of demand = % change QD

% change P
⬥ Percentage Change in QD – 25%
.25/.15 = 1.67 Elastic
⬥ Percentage Change in Price – 15%

⬥ Percentage Change in QD – 10%

.10/.15 = .67 Inelastic
⬥ Percentage Change in Price – 15%

⬥ Percentage Change in QD – 15%

.15/.15 = 1 Unitary Elastic
⬥ Percentage Change in Price – 15%
Application – The Midpoint Method
(Q2 – Q1) / [(Q2+Q1) / 2]
Price Elasticity =
(P2 – P1) / [(P2 + P1) / 2]

20 - ________)
(_______ 10 20
/[________ 10
+ ________/2] = .67
________________________________________ .67/29 = 2.3 Elastic
4 - ________)
(_______ 3 4 + ________/2]
/[________ 3 = .29
4.00
Quantity Demanded of Table Salt
0
1.00
2.00
$7.00
6.00
5.00
3.00
Price

Application – Elasticity of Table Salt

(Q2 – Q1) / [(Q2+Q1) / 2]
Price Elasticity =
(P2 – P1) / [(P2 + P1) / 2]

(_______ 10
15 - ________) 15 + ________/2]
/[________ 10 = .40
________________________________________ .40/1 = .4 Inelastic
2 6 2 =1
6 - ________) /[________ + ________/2]
(_______
4.00

5 10 15 20 25 30 35
0
Application – The Midpoint Method
(Q2 – Q1) / [(Q2+Q1) / 2]
Price Elasticity =
(P2 – P1) / [(P2 + P1) / 2]
Price
$10.
00 10 - ________)
(_______ 8 10 + ________/2]
/[________ 8 = .22
________________________________________ .22 Unitary Elastic
8.00 =1
10 8 10 8 .22
(_______ - ________) /[________ + ________/2] = .22

8
10 Quantity
0
Elasticity Application One
Price
(Q2 – Q1) / [(Q2+Q1) / 2]
$7.00 Price Elasticity =
(P2 – P1) / [(P2 + P1) / 2]
6.00

5.00
4.00
20 10 20 10
(_______ - ________) /[________ + ________/2] .67
________________________________________
3.00
5 3 5 3 .50
2.00 (_______ - ________) /[________ + ________/2]

1.00

5 10 15 20 25 30 35
Quantity Demanded of Ice-Cream Cones per week

▪ Elasticity ______
.67 / .______
50 = ________
1.34
▪ Did the price change cause an elastic or inelastic response in the QD for
ice cream cones? ___________
Elastic
0

Elasticity Application Two

Price

$7.00
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
6.00

5.00
4.00 8 - ________)
(_______ 5 /[________
8 5
+ ________/2] .46
3.00 ____________________________________________
6 2 6 2 1
2.00 (_______ - ________) /[________ + ________/2]

1.00

5 10 15 20 25 30 35
Quantity Demanded of Ice-Cream Cones per week

.46 /______
• Elasticity ______ 1 .46
= ________
• Did the price change cause an elastic or inelastic response in the QD for
Inelastic
insulin? __________________
Elasticity Application Three
Scenario: The Apple store in St. John’s Mall made the decision to drop the price of their Apple Watch
SE from $150 to $125. As a result, the sale of Apple Watches increased from 200 a week to 250.
Price of QD per week Price Per Apple Watch
Apple Watch SE

150 200 150

.22 /______=
•Elasticity ______ .18 1.22
________
125 250

250 200 250 200 =.22 125

(_______ - ________) /[________ + ________/2]
________________________________________
150 125 150 125 =.18 200 250 QD
(_______ - ________) /[________ + ________/2]

2. Did the price change cause an elastic or inelastic response in the QD? ___________________
Elastic
3. If the firm drops their price by _________%,
18 they will see an increase in sales of __________%
22
4. To determine if this is a good decision for the firm, calculate the total revenue of each price:
150
- Multiply the first price of the watch by the first QD $______ 200
x _______ = $30,000
_____________
- Multiply the second price of the watch by the second QD – $ ______ x _______ = $31,250
125 250 ____________
$125
- Which price point generates the most total revenue? __________
Computing the Price Elasticity of Demand
Classifying Elasticity
1. When the price elasticity of demand is greater than one, demand is defined to be
elastic
________________________
2. When the price elasticity of demand is less than one, the demand is defined to be
inelastic
________________________
3. When the price elasticity of demand is equal to one, the demand is said to have
unit elasticity
_________________________
greater than
4. If demand is inelastic, the percentage change in price will be _______________than the percentage change
in quantity demanded.
greater than than the
5. If demand is elastic, the percentage change in quantity demanded will be ______________
percentage change in price.
equal
6. If demand is unit elastic, the percentage change in price will be ___________ to the percentage change in
quantity demanded.
Computing the Price Elasticity of Demand
1. The price of ice cream rises by 10 percent and quantity demanded falls by 7 percent.
.07/.10 = .7
•Price elasticity of demand = __________________
Inelastic
•Inelastic or elastic __________________________
2. The price of table salt falls by 20 percent and quantity demanded increases by 4 percent.
.04/.20 = .2
•Price elasticity of demand = __________________
Inelastic
•Inelastic or elastic __________________________
3. The price of electricity rises by 30 percent and quantity demanded falls by 17 percent.
.17/.30 = .57
•Price elasticity of demand = __________________
Inelastic
•Inelastic or elastic __________________________
4. The price of the Hummer falls by 40 percent and quantity demanded increases by 20 percent.
.20/.40 = .5
•Price elasticity of demand = __________________
Inelastic
•Inelastic or elastic __________________________
5. The price of Ben and Jerry’s ice cream falls by 10 percent and quantity demanded increases by 40 percent.
.40/.10 = 4
•Price elasticity of demand = __________________
Elastic
Inelastic or elastic __________________________
Computing the Price Elasticity of Demand
The Midpoint Method
Midpoint Method = Q2-Q1/(Q2+Q1)/2
P2-P1/(P2+P1)/2
•The price rises from $4 to $6, and quantity demanded falls from 120 to 80.
120 - ________)
(_______ 80 /[________
120 + ________/2]
80
.4 1
____________________________________________ = __________ = __________

6 - ________)
(_______ 4 6 + ________/2]
/[________ 4 .4
Unit elastic
1.Inelastic, elastic, unitary elastic __________________________
Computing the Price Elasticity of Demand
The Midpoint Method
Midpoint Method = Q2-Q1/(Q2+Q1)/2
P2-P1/(P2+P1)/2

•The price rises from $5 to $10, and quantity demanded falls from 10 to 20.

20 - ________)
(_______ 10 20 + ________/2]
/[________ 10 .67 1
____________________________________________ = __________ = __________
.67
10 - ________)
(_______ 5 /[________
10 + ________/2]
5
Unit elastic
1.Inelastic, elastic, unitary elastic __________________________
•The price falls from $100 to $50 and quantity demanded falls from 60 to 40.
60 - ________)
(_______ 40 /[________
60 + ________/2]
40
.4 .6
____________________________________________ = __________ = __________
.67
100 - ________)
(_______ 50 /[________
100 + ________/2]
50
Inelastic
1.Inelastic, elastic, unitary elastic __________________________
Computing the Price Elasticity of Demand
Scenario: The Honda Civic increase in price from $20,000 to $22,000 and the quantity of Civics sold each

week falls from 2 to 1.

2 - _______)
(_______ 1 2 + _______/2]
/ [_______ 1
.67
____________________________________________ = __________ 7.4
= __________
22000 - _______)
(_______ 20000 / [_______
22000 + _______/2]
20000 .09
Inelastic, elastic, unitary elastic ______________
Elastic
Computing the Price Elasticity of Demand

Scenario: Marlboro cigarettes raise in price from $3.00 a pack to $6.00 and the quantity of Marlboro packs
sold each week falls from 20000 to 1000.

20000 - ________)
(_______ 1000 / [________
20000 + ________/2]
1000
1.8 2.68
____________________________________________ = __________ = __________
6 3 6 3 .67
(_______ - ________) / [________ + ________/2]
Elastic
∙ Inelastic, elastic, unitary elastic __________________________
Computing the Price Elasticity of Demand
Scenario: A local pizzeria is trying to determine whether or not to drop the price of their pizza from
$3.00 to $2.00. At $3.00 they will sell 100 slices per week and at $2.00 they will sell 200. Determine the
price elasticity of demand and then explain why they should or should not drop the price.

200 100 200 100

(_______ - _____) / [______ + ______/2]
.67 1.65
____________________________________________ = __________ = __________
3 2 3 2 .4
(_______ - _____) / [______ + ______/2]
Elastic
∙ Did the price change cause an elastic or inelastic response? __________________

∙ If the firm drops their price by _________%,

40 67
they will see an increase in sales of __________%
Computing the Price Elasticity of Demand

To determine if this is a good decision for the firm, calculate the total revenue of each price:
- Calculate the total revenue of each price:
3 x _______
1. Multiply the first price per slice by the first QD, $______ 100 = _____________
300
2 x _______
2. Multiply the second price per slice by the second QD, $ ______ 200 = _____________
400
$2.00
3. Which price point generates the most total revenue? __________________
Total Revenue = P*Q
• Total Revenue – the amount paid by buyers and received by sellers of a good
• Price of the goods x quantity demanded = Total Revenue

Price Per Taco QD Total Revenue

$2.00 75 150
1.75 100 175
1.50 125 187.5
1.25 165 206.5
1.00 175 175
0.75 200 150
SUMMARIZER – ELASTICITY OF DEMAND

What is the difference between elastic and inelastic demand?

large relatively small
• Elastic products have a _________response in sales based on a _______________change in
price (wants).
small
• Inelastic products have a ________response relatively large change in
in sales based on a _______________
p (needs).