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Module 4 Elasticity
HCM - Microeconomics Learning Community Workbook
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What is the price elasticity of demand used for?
It can be used for deciding the price of goods and services To inform us about how much quantity demanded will change when there is a change in the price of a good.
When price elasticity of demand is less than one, what does this mean?
it is Inelastic
When price elasticity of demand is greater than one, what does this mean?
it is Elastic
When price elasticity of demand is equal to one, what does this mean?
it is Unit Elastic
Give an example of an inelastic good or service that you might purchase.
Why do you think this is a good example of an inelastic good or service?
gasoline; due to the fact that no matter the price we still will buy because there are not many substitutes
Potato Chips Surgical Procedures 4K TVs Apples
Elastic
demand
Inelastic
demand
The blue circles below indicate the classifications of price elasticity of
demand. Drag each gray shape containing examples of goods and services
to the best category. (hint: think like the market---not just what you would do!)
Milk New Cars A bar of soap A driver’s license renewal fee
If the price Increases by 10%
And the
Quantity
The elasticity equals And the demand is (elastic,
inelastic, unit elastic)
Decreases by 15%
1.5 elastic
Decreases by 10% 1 unit elastic
Decreases by 2% .2^ inelastic
Equilibrium price decreases Equilibrium price increases Equilibrium quantity increases Perfectly elastic and supply increases Perfectly elastic and supply decreases Perfectly inelastic and supply increases
The blue circles below indicate a market with either perfectly elastic or perfectly inelastic
demand in equilibrium. After the given supply change in each scenario, draw the
corresponding graph (add lines with the line tool above), match the corresponding change
in equilibrium quantity and equilibrium price found in the gray and green shapes.
Perfectly inelastic and supply decreases Equilibrium quantity decreases Equilibrium price does not change Equilibrium quantity does not change Equilibrium price does not change Equilibrium quantity does not change
Elasticity and Total Revenue
- Elastic Demand
- P↑ → TR ↓
- P ↓ → TR↑
- Inelastic Demand
- P ↑ → TR ↑
- P ↓ → TR ↓
fill in the missing boxes
Price Total Revenue Elastic or
Inelastic?
P↑ TR↑
inelastic P↑ TR ↓ elastic P ↓ TR ↓ Inelastic P ↓ TR↑ Elastic
Income Elasticity
- (^) What is income elasticity used for?
To determine whether a good
is normal or inferior.
- (^) write the income elasticity formula below: Elasticity=percent change in quantity demanded divided by the percent change in the income
- (^) What is income elasticity used for?
To determine whether a good
is normal or inferior.
- (^) write the income elasticity formula below: Elasticity=percent change in quantity demanded divided by the percent change in the income -
When income elasticity is positive, what does
this mean?
it means the good is a normal good
- (^) When income elasticity is negative, what does
this mean?
it means the good is inferior
Income elasticity
- Normal -- positive
- Inferior -- negative
fill in the missing boxes
Income
Change
Quantity
Change
E
I
= Normal or
Inferior?
Increase by 5% Increase by 3% .6 normal Increase by 5% Decrease by 3% -0.6 (^) inferior Decrease by 5% Increase by 3% -0.6 (^) inferior Decrease by 5% Decrease by 3% .6 (^) normal
Cross Price Elasticity
- (^) What is cross price elasticity used for?
to determine if two goods are substitutes
or complements
- (^) write the cross price elasticity formula below: percent change in quantity demanded of product A divided by percent change in price of product B
- (^) What is cross price elasticity used for?
to determine if two goods are substitutes
or complements
- (^) write the cross price elasticity formula below: percent change in quantity demanded of product A divided by percent change in price of product B -
When cross price elasticity is positive, what
does this mean?
the goods are substitutes
- (^) When cross price elasticity is negative, what
does this mean?
the goods are complements
Cross Elasticity of Demand
emergency rooms
monitors and
insulin
Price change Quantity Change E XY Substitutes or Complements? Increase by 4% Increase by 2% .5^ sub Increase by 4% Decrease by 2% -0.5^ comp Decrease by 4% Increase by 2% -0.5^ comp Decrease by 4% Decrease by 2% .5^ sub
Consumer incomes recently fell by 5% and the demand for mental
healthcare services increased by 10% at the same time. What type
of good does this situation represent?
Step 1: Which elasticity formula will you use based on the given information? Choose one from the gray shapes to the right and drag it below. Step 2: Based on the formula that you chose, work the problem with the given information. “Double-click” on the box below and then type your answer in the box. What type of good is this based on your answer? Choose one from the green shapes to the right and drag it below.
Mental healthcare services are considered an inelastic good.
With a 10% increase in the price for mental healthcare services,
if it is known that the elasticity of demand for these services is
0.5, what is the change in quantity demanded?
Step 1: Which elasticity formula will you use based on the given information? Choose one from the gray shapes to the right and drag it below. Step 2: Based on the formula that you chose, work the problem with the given information. What will the price change be? Choose an answer from the green shapes to the right and drag it below.
