Chapter 5: Elasticity Elasticity of demand: A measure of how sensitive individuals are to changes in price FAU Student Health Care

Coverage: 2012 2013 price = $1,448; 2011 2012 price = $1,362 Response = Riot? Elasticity Formula: ED = % change in quantity / % change in price Calculating percentage changes: Base Method vs. Midpoint Method Base Method: % change in price = Change in price / old price % change in quantity = Change in quantity / old quantity Practice Question: If textbook prices rise by 20%, and quantity demand falls by 12%, what is ED? Practice Question: If Boomers raises mini golf rounds from $5 to $6, and sales fall from 100 to 70, what is ED? What do ED numbers mean? ED > 1 (Elastic); ED < 1 (Inelastic); ED = 1 (Unitary elastic) Characteristics of ED > 1 (Elastic goods): Many substitutes; large percentage of income; luxury goods Characteristics of ED < 1 (Inelastic goods): Few substitutes; inexpensive goods; necessities Some goods can be elastic and inelastic: Smart phones are inelastic, but an LG smart phone is elastic Elasticity can differ between the short run and the long run Graphs of elasticity: Perfectly inelastic demand is vertical; as elasticity increases, the demand curve becomes flatter until it becomes horizontal (perfectly elastic) How do you give someone a wedgie? You pull straight up because it is less elastic! Why is inelastic demand steeper? Because a change in price corresponds to a smaller change in quantity on the graph Practice Question: If the price of Ed Hardy shirts falls by 10% and ED= 1.2, what will happen to sales? Calculating percentage changes: Base Method vs. Midpoint MethodWhen the Dow stock index dropped from 14,000 to 7,000, it fell 50%. But when it rose from 7,000 back to 14,000, it increased 100%. Using the midpoint method keeps these percentages the same. Midpoint Method: % change in price = Change in price / [(old price + new price) / 2] % change in quantity = Change in quantity / [(old quantity + new quantity) / 2] Practice Question: Using the midpoint formula, what is the percentage change from 10 to 12? Practice Question: Using the midpoint formula, what is the percentage change from 12 to 10?

Practice Question: Using the midpoint formula, what % does the Dow need to rise to go from 7,000 to 14,000? Practice Question: Using the midpoint formula, if the price of Netflix subscriptions rises from $10 to $15, and sales fall 48%, what is ED? Practice Question: If the price of movie rentals goes from $4.50 to $5.50, and quantity demanded falls from 1000 to 600, what is ED? The End