Demand

1
Chapter 21

• Demand Supply Elasticity

2
Things to understand

• Define calculate Price Elasticity of Demand
• Classify demand as elastic, inelastic, unitary
  elastic
• Influences on Price Elasticity of Demand
• Define price elasticity of supply, cross price
  elasticity of demand, income elasticity of
  demand
• Perfectly Elastic vs Perfectly Inelastic demand
  and supply

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What is elastic?

• In everyday usage, rubber band is considered
  elastic because its length changes in response to
  pull-pressure
• Lengthens with increased pull
• Shortens with less pull
• The more responsive, the more elastic
• In economics, elasticity deals with how
  responsive one variable is to a change in the
  value of another.

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Price Elasticity of Demand

• Concept How sensitive the quantity demanded is
  to a change in price
• Example Which will have more impact on quantity
  sold 50 reduction in price of salt vs 50
  reduction in price of IPODs?
•  Definition change in quantity demanded when
  there is a 1 change in price
• Generic formula

change in Quantity Demanded change in Price  
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Arc Formula

• (Qn-Qo)/ (QnQo)
• (Pn-Po)/(PnPo)
• Price Elasticity of Demand cofficient is always
  negative due to law of demand

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Classifying Elasticity

• Use absolute value of coefficient.
• Elastic absolute value gt 1
• Total Revenue increases as price decreases
• Inelastic absolute value lt 1
• Total Revenue increases as price increases
• Unit Elastic absolute value 1
• No change in Total Revenue when price changes

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Example Situation A

• Team is in the middle of a winning season
  exciting games
• P 8 Q demanded 10,000 total revenue
  80,000
• If price is raised to 10, most fans still come
  to the games. Q demanded 9,500 total revenue
  95,000
• Demand is inelastic.

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Example Situation A

• Team is in middle of winning season exciting
  games
• Po 8
• Pn 10
• Q0 10,000
• Qn 9,500
• TRo 80,000
• TRn 95,000

• (9,500-10,000)/
• (10,0009,500)
• (10-8)/(108)
• -500/19,500
• 2/18
• -0.02564/.1111
• -.23076

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Example Situation B

• Team losing games like crazy games are
  depressing.
• P 8 quantity demanded 10,000 total
  revenue 80,000
• If P is raised to 10, many fans stop coming.
  Quantity demanded 7,500 total revenue
  75,000
• Demand is elastic.

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Example Situation B

• Team losing games like crazy games are
  depressing.
• Po 8
• Pn 10
• Qo 10,000
• Qn 7,500
• TRn 80,000
• Tro 75,000

• (7,500-10,000)/
• (7,50010,000)
• (10-8)/(108)
• -2,500/17,500
• 2/18
• -.14286/0.11111
• -1.28575

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Price elasticity of demand and total revenue

• Elastic demand
• Increase price, decrease TR
• Decrease price, increase TR
• Inelastic demand
• Increase price, increase TR
• Decrease price, decrease TR
• Unit elastic demand
• Change price, no change TR

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Elasticity along demand curve

• P increase from 2 to 4
• Elasticity coefficient -33333
• P increase from 8 to 10
• Elasticity coefficient -3.0
• Elastic portion of demand curve
• Occurs at higher prices
• Reduce price to increase revenue
• Unit elastic portion of demand curve
• Maximum total revenue
• Inelastic portion of demand curve
• Occurs at lower prices
• Increase price to increase revenue

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• LANSING STATE JOURNAL - May 30, 2006
• Theme parks increase rides, decrease pricesAlong
  for the thrill
• KRT News Service
• A supersized swing that catapults thrill seekers
  125 feet into the air and a 1,500-foot water ride
  are among scores of new attractions opening this
  summer at Midwest theme parks.
• But the most talked-about change at Cedar Point
  amusement park in Ohio isn't the addition of the
  swing, called the Skyhawk.
• It's the drop in prices - from a 5 cut in
  admission for adults to cotton candy that now
  sells for a quarter. Just about every food item
  is cheaper or the same price as last year.
• Cedar Point hopes the moves will increase
  attendance after a down year in 2005.
• Indeed, many theme parks are adding new rides
  while at the same time tinkering with price cuts
  or other "value" boosts. Here's a look at the
  trends.
• The rides
• At Cedar Point, the swinging Skyhawk will propel
  riders up to 60 mph as they get that 125-foot
  catapult.
• To celebrate its 50th anniversary, Michigan's
  Adventure north of Muskegon is opening the most
  expensive new attraction in the park's history, a
  1,500-foot water ride that cost more than 5
  million. Guests on The Grand Rapids will navigate
  in nine-person rafts the twists of a man-made
  river that pays homage to the region's logging
  history.
• A major new wooden coaster is The Voyage,
  premiering at Holiday World in Santa Claus, Ind.
  Offering 24.2 seconds of weightlessness, the ride
  whooshes guests through five underground tunnels,
  three sections of 90-degree banks and three drops
  over 100 feet at 67 mph.
• "Coaster aficionados are looking at these with a
  great amount of anticipation," said Arthur
  Levine, theme park guide for the Web site
  About.com.
• New roller coasters are rumbling into Six Flags
  parks across North America. Goliath, at both Six
  Flags Over Georgia and La Ronde in Montreal,
  boasts an initial drop of more than 171 feet and
  a three-minute ride at about 70 mph.
• Six Flags Magic Mountain outside of Los Angeles
  opens Tatsu, billed as "A New Species of Fear."
  The serpent-themed flying coaster winds through
  the park's rocky terrain at 62 mph, taking riders
  horizontally through trees in a Superman-like
  flying position.
• Walt Disney World in Orlando offers Everest, a
  coaster that simulates a mile-long runaway train
  ride through the Himalayas that brings visitors
  face-to-face with the yeti, the most complicated
  animatronic character Disney has created. The
  ride features a train navigating an 80-foot drop,
  rumbling over bridges and through valleys
  backward and forward to "escape" the monster.
• Dollywood in Pigeon Forge, Tenn., is debuting the
  Timber Tower, a 6.5 million, 2.5-minute ride
  that simulates splashing into a pond from 65 feet
  high. Guests spin in a circular ride vehicle
  around the tower until it elevates to the top,
  then topples several times at 60-degree angles.
• Still, industry analysts say this could be the
  last year in a while to offer a bumper crop of
  new coasters, as many parks continue to focus
  more on drawing parents and families than
  thrill-seeking teens.
• "The public has indicated the last two years that
  they're a little tired of the roller coaster
  scene," said Dennis Speigel, president of
  International Theme Park Services Inc. in
  Cincinnati. "They're still an important part, but
  the message they're sending to the parks is,
  'Give us something else, give us a broader and
  more themed experience.' "

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Factors impacting Price Elasticity of Demand

• of Substitutes in Demand
• More substitutes more elastic
• Proportion of income spent on product (compare
  newspaper and rent)
• 10 increase price on newspaper rent have
  different effect
• Luxury vs necessity
• Length of time
• Less elastic in the short run more time more
  information to find other substitutes, so more
  elastic in the long run

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Other Types of Elasticity

• Price elasticity of supply sensitivity of
  quantity supplied to changes in price
• Cross-price elasticity of demand how sensitive
  the quantity demanded of a product is to changes
  in the price of a related product (substitute or
  complement)
• Income elasticity of demand the sensitivity of
  quantity demanded to a change in income

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Perfectly elastic or inelastic

• Perfectly elastic demand curve is horizontal
• Any change in price leads to an infinite change
  in quantity demanded
• A perfectly inelastic demand curve is vertical
• A set quantity regardless of the price level
• Example drug addict