Elasticity of Demand

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Transcript Elasticity of Demand

Elasticity of Demand
Chapter 4 Section 3
Demand Elasticity
 Elasticity= the cause and effect relationship in economics.
 Demand Elasticity= measure of how much a change in price
causes a change in the quantity demanded.
 Tells how sensitive consumers are to changes.
Elastic Demand
 When a change in price causes a relatively larger change in
quantity demanded, demand is considered to be Elastic.
 Typical for products like green beans, corn, tomatoes or
other fresh garden vegetables.
Inelastic Demand
 A given change in price causes a relatively smaller change in
quantity demanded.
 Typical for products like table salt.
Unit Elastic Demand
 Change in price is roughly the same as the change in quantity
Total Expenditures Test
 The impact price change has on total expenditures helps us
to estimate elasticity.
 Total expenditures= the amount that consumers spend on a
product at a particular price.
 TE= price X quantity demanded
 For Elastic demand, change in price and TE are inverse.
 For Inelastic demand, change in price and TE are directly
related. (when one goes up the other goes up)
Elasticity and Profits
 Companies that sell products that have an elastic demand will
lose money from raising prices instead of making more
 Read the example cover story on page 101.