Inelastic Demand

Inelastic Demand

Elasticity is all about the changes.

Elasticity Cheat Sheet here

**You must know the determinants.

Determinants of Inelastic Demand? 

Low Price 

The price of my favourite candy bar increased by 10%, I didn't notice.

  (My demand for my favourite candy bar is inelastic as a 10% price increase is such a low amount I don't notice it or let it change my preference)

Necessity 

The price of black beans increased by 20% and I don't care. 

(I love black beans and consider them a necessity in my kitchen. My demand for Shitto is inelastic)

I've eaten a lot of Shitto in my life.

I'm a Shitto magnet

Ok, that's enough.

Short (Time) Horizon

Sometimes you don't have the capacity to be shopping around for the lowest price.

(My demand for a toilet is inelastic when I have to go bad)

Addictive 

If a good is addictive then your desire for that good doesn't diminish very much if the price increases.

Therefore your demand for the good is inelastic.

Low Number of Substitutes

Often if something is unique or if the choices are limited then your demand will be inelastic.

**Know that the Inelastic Demand curve is drawn very steeply.

When Supply decreases the price for Petrol increases by a larger amount that the Quantity Demand,
Why?
There is no close substitute for Petrol, therefore the Demand is Inelastic

** Know that any and every demand curve has an elastic section and an inelastic section.

Recognise, that the inelastic section of the curve is at the lower prices, this often causes confusion but it shouldn't,,,
at low prices a 10% change in the price does' t really affect the amount we buy,, or our quantity demand.

**Know that Inelastic Demand means that the percentage change in quantity demand is less than the percentage price change. 

We can see that with a price increase, quantity demand has changed less
When you are demand inelastic you just don't react as much to a price change

** Know Perfectly Inelastic demand is that no matter the Price change (great or small) the same amount of a good will be bought.

** Understand that the PED of a perfectly inelastic curve is zero and that the PED for a relatively Inelastic demand is between zero and 1.

Perfectly Inelastic PED is zero (0) 

This makes sense in that with a price change there is a (0) % change in the quantity demanded

Relatively Inelastic Demand is a number between zero (0) and 1

Inelastic Demand = 0 < PED < 1

This makes sense as the % change in quantity demand is less than the % change in price  

Elasticity Cheat Sheet (Updated)

Elasticity Cheat Sheet (Updated)

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YED - Income Elasticity

YED - Income Elasticity

YED - is the responsiveness of the Qd, of a good, to the change in the incomes, (Y) of people demanding the good. Income, (Y) elasticity determines whether the good is normal or inferior.

Formula 

Formula for computation

Graph for Reference.

• If YED is negative the good is an inferior good.
• If YED is positive the good is a normal good.
• If YED is positive but below one, the good is income inelastic (necessity)
• If YED is positive but above one, the good is income elastic (luxury)
• If YED = 0, a % change in income does not effect the Qd of the good
• If YED = 1, a % change in income = a % change in Qd of the good (Unitary Elasticity)

Another graph for reference is the Engel's curve.

As income increase the Qd for a normal good is positively related, Qd increase.

AS income increases the Qd for an inferior good is negatively related, Qd decrease

Examples

Answer - (B) An increase in the average income f consumers and an increase in the price of a variable input.

So, YED of a normal good (positive and increasing with incomes) drives up price as demand increases (shifts right) and as an input cost/resource cost increases (Determinant of Supply) supply shifts leftward increasing the price of the good more.

Example 2)

Answer is (D) X is an inferior good and is a compliment to Y.

as the cross-price elasticity is negative, we understand that means the two goods are compliments

and as the YED (income elasticity of demand) is negative the good is an inferior good

Example 3)

(b) You must know that a negative coefficient is an inferior good and that as incomes rise less of the good is demanded. (leftward shift of the demand curve)

XED Cross Price Elasticity - Substitutes

XED Cross Price Elasticity - Substitutes

XED - responsiveness of the Qd of a good (Good A) to a change in the price of another good (Good B). Cross elasticity determines whether the goods are substitutes or complements.

Formula - 

Understand: That you will be given a price change of one good (Good A) and then will compare it with the quantity change of another good (Good B).

Understand: You should be able to recognise that a positive XED (more than zero) is a substitute.

Substitutes are like Coke and Pepsi, Beef and Chicken. Goods that are substituted for one another.

If the price of Coke increases then people will switch to the cheaper good (Pepsi)

Price of Coke Increases and the Quantity Demand for Pepsi Increases

Notice the positive relationship.

Opposite is also true, if the price of Coke decreases the Quantity demanded for Pepsi decreases

again the formula:

8 - 6/6     OR    .333 = 1.333

5 - 4/4                .25

SO, no absolute value for XED (like PED) and more than zero (positive) and therefore a substitute.

Weakly related or strongly related substitutes I haven't seen tested in the AP Exam but references were there in some questions.

To Know: Substitutes

1) XED - responsiveness of the Qd of a good (Good A) to a change in the price of another good (Good B). Cross elasticity determines whether the goods are substitutes or complements.

2) No absolute value for XED

3) XED > 0 -  Substitutes

4) Positive = Substitutes

5) Price of Good A increase the Quantity Demand of Good B increases or the price of good A decreases and the Quantity Demand of good B decreases

Examples -

Look at (b) (ii) one point is earned for explaining that peanuts and bananas are substitutes and since the price of bananas increased it would cause the demand for peanuts to increase.

Also look at (c) (i) One point is earned for stating that the substitution effect causes the quantity of bananas demanded to decrease.

The Substitution Effect - one of the three reasons the demand curve slopes down - as the price of one good rises, consumers will switch to the cheaper good.

XED (Cross Price Elasticity) Compliments

XED (Cross Price Elasticity)

XED - the responsiveness of the Qd of a good (Good A) to a change in the price of another good, (Good B). Cross price elasticity determines whether the goods are substitutes or complements.

Formula

Understand:  That you will be given a price change of one good (Good A) and then compare it with the quantity change of another good (Good B) and will use this formula for computations.

Understand: That it is more likely that you should be able to recognise that a negative XED (less than zero) is a compliment.

Complements are like bread and butter or hamburgers and fries or Korean fried chicken and beer. Two goods that are consumed/used together.

If the price of Korean Fried chicken increases then we would expect a less quantity demanded of Korean fried chicken. Less fried chicken mean less beer consumed as they are consumed together.

So, price of good A (Korean Fried Chicken) increases and therefore the amount of beer consumed decreases (good B) Price increases and Qd decreases.

again the formula

So, 6 - 8/8    or    -.25    which is -1

      5- 4/4             .25

So, no absolute value for XED (like PED) and less than 0 (negative) means that the two goods are compliments. 

(Obviously, the opposite holds true - If the price decreases (good A) then the Qd of good B will increase.)

Weakly related or strongly related compliments I haven't seen tested in the AP exam but the reference was there in a couple of questions.  

To know: Compliments

1) XED - (Cross price elasticity) - definition - the responsiveness of the Qd of a good (Good A) to a change in the price of another good, (Good B). Cross price elasticity determines whether the goods are substitutes or complements.

2) No absolute value for XED

3) XED < 0, then compliments 

4) Negative = Compliment 

5)  Price increases and Qd decreases or Price decreases and Qd increases.

Examples: I have only found one example.

Answer is (D) X is an inferior good and is a compliment to Y.

as the cross-price elasticity is negative, we understand that means the two goods are compliments

Elasticity Cheat Sheet (updated)

Elasticity Cheat Sheet (updated)

New stuff,,  New stuff added to XED and YED.  The AP examiners seem to accept the alternative formula for finding PED or the midpoint formula for year 2015 FRQ #3 .

2014 Microeconomics FRQ #3

2014 Microeconomics FRQ #3

You can. 

Yes. Yes, you can. 

I think so.

Now, you must think so.

Watch me answer this on youtube https://youtu.be/_ZZAvxgohsE

3. Assume that gasoline is sold in a competitive market in which demand is relatively inelastic and supply is relatively elastic.

(a) Draw a CLG of the gasoline market. On your graph show the equilibrium price and quantity of gasoline, labeled Pe & Qe.

(b) Suppose the gov't imposes a $2 per unit tax on the producers of gasoline. On your graph from part (a), show each of the following after the tax is imposed.

(i) The price the buyer paid, labeled PB.

So, the government imposes a $2 dollar tax, on producers. Producers supply the good so the price of the good has to include the tax,, therefore the (S + tax) shifts up by the $2 dollar amount.

(ii) The after-tax price received by sellers, labeled PS.

Remember, that the seller has to send $2 of what he receives to the government, and the distance between S & S + tax is the $2 dollar amount.

(iii) The quantity labeled, QT.

(C) Using the labelling on your graph, explain how to calculate the total tax revenue collected by the government.

The total tax revenue can be found by taking the amount of the tax ($2) and multiplying it by the new (after tax) quantity sold.

So, $2 x QT

or, (PB - PS) x QT  

or , TAX x QT

(D) Will the tax burden fall entirely on buyers etc etc etc etc...

The tax buyers will fall more on buyers and less on sellers because the demand curve is more inelastic than the supply curve.

If the demand curve is inelastic (think drugs) then consumers will have less substitutability and will not change their buying patterns (relatively) with the increase in price.

Therefore, even when the price goes up,, demand for the good does not decline as much as the price rise.

Look at the graph, the wedge between PE and  PB (buyers wedge) is greater than the wedge between PE and PS (sellers wedge).

The wedge is the amount of tax incidence on each party,, buyer or seller.