Transcript The Elasticity of a good’s demand tends to increase with:

Elasticity
Measures “responsiveness” to change
in price
(Measures a Movement; Price Effect)
Price Elasticity of Demand
 Sensitivity of quantity demanded to price
changes
 Elastic: Small P-change, large Q-demanded
change
 Inelastic: Large P-change, small Qdemanded change
Elastic, Inelastic
 Elastic – E(d) > 1
 Inelastic – E(d) < 1
 Perfect Inelastic – completely price
Insensitive – E(d) = 0
 Perfect Elastic – Completely Price Sensitive
– E(d) = infinite
Coefficient of Price Elasticity
 To determine how elastic a product is, in
other words, how demand for that product
will be affected by a change in price, use the
following equation.
 E(d) = ( QD/QD) / ( P/P)
 Allows us to compare across markets and
other goods
Practice
 Starting at Price P1 = 20, Quantity Q1 = 200
 Price goes to P2 = 24, Quantity Q2 = 180


P1 = 20
P2 = 24
Q1 = 200
Q2 =180
[(180-200)/200] / [(24-20)/20]
(20/200) / (4/20) = .1/.2
E(d) = .5
Elasticity and Demand Curves
 Example: 10% Price
Increase
 D Inelastic [E(d) < 1]
QD decrease less than
P increase
 D Elastic [E(d) > 1]

QD decreases more
than price increase
Price

Elasticity and Demand Curves
80
60
Inelastice
40
20
0
Elastic
1
2
3
4
5
Quatntity Demaned
P1 = 40
P2 = 44
QD for each curve?
Practice
 Determine the
Elasticity.
 P1 = 2
 P2 = 4
Demand
Price
6
4
Dem and
2
0
1
2
3
4
Quantity Demanded
5
Practice
 Determine the Elasticity.
 P1 = 100
 P2 = 200
Price
Demand
250
200
150
100
50
0
Dem and
1
2
3
4
Quantity Demanded
5
Perfectly/Inelastic Demand
 Perfectly Inelastic: QD is unresponsive tp P change


Draw a demand curve that displays Perfect Inelasticity.
Examples
 Perfectly Elastic: QD totally responsive to P change




Draw a demand curve that displays Perfect Elasticity.
P-increase: QD = 0
P-decrease: buyers buy all they want
Examples
The Elasticity of a good’s
demand tends to increase with:
 Number of closes substitutes.
If there are 10 brands of bicycles available and
the prices for one of them increase, the
quantity of that brand demanded is likely to
fall a lot.
Elasticity (Cont.)
 The proportion of income spent on the
good.
Consider gum and cruise price-change
scenarios. The quantity of cruises purchased
will probably be more affected by a 50%
price increase than the quantity of bubble
gum because an extra 2 cents is not a big
deal but an extra $500 is more likely to be
prohibitive.
Elasticity (Cont.)
 Time
 When time is short, it is more difficult to
change purchasing patterns in response to
changes. The more time consumers have to
adapt, the more they are able to find
substitutes or learn to do without goods
whose prices have increased.
Elasticity (Cont.)
 The lack of importance of a good
 The less essential a good is, the more likely
consumers are to forego the good when it
becomes more expensive.
Luxuries v. Necessities
Goods with an elastic demand are
categorized as luxuries.
Goods with an inelastic demand are
categorized as necessities.
Why should a business care
about the elasticity of demand?
 One reason is that the elasticity determines
what happens to revenue when price
changes.
 Revenue = Price x Quantity
 When facing a inelastic demand, to bring in more revenue
while selling fewer units, raise the price of the good.