Transcript Elasticity of demand

Elasticity of demand
Elasticity refers to how
much quantity demanded
changes when the price of
a good changes.
Its sensitivity to price.
Inelastic Demand
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If the quantity barely changes it is
inelastic or rigid, it is not price sensitive
If the % change in quantity demanded
is less than the % change in price, the
good has inelastic demand.
Inelastic Examples:
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Gasoline
Electricity
Water
Elastic Demand
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If price changes cause big changes in
quantity demanded then it elastic or
flexible.
Quantity demanded is price sensitive
If the % change in quantity demanded
is greater than the % change in price,
the good has elastic demand.
Elastic Examples:
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Candy
Clothing
Specific brands
Movie tickets
Unitary Elasticity
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The % change in price equals the %
change in quantity demanded
3 Determinants of elasticity:
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These determinants are combined to
help determine the degree of elasticity
of demand
1. # of adequate Substitutes
available.
 a. The more substitutes,
the more elastic
 b. Fewer subs, more
inelastic
2. Luxury or Necessity
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a. Luxuries (really just non-necessities)
tend to be elastic
b. Necessities tend to be inelastic
3. % of income the good
costs you
a. If it is inexpensive (small % of
income) it will tend to be inelastic
b. If it is a high % of income, it will
tend to be elastic
Graphing each
Inelastic
Elastic
P2
P
P
P2
P1
P1
Q2 Q1
Q
Q2
Q
Q1
Time and its impact?
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Over time elasticity may change…for
example substitutes may develop (ex.
Electric cars, hydrogen cars provide
substitutes for gas power)
Yesterday’s luxury (like cell phones,
cars) may be today’s necessity
Elasticity Co-efficient
% Change in Quantity Demanded
% Change in Price
Elastic if greater than 1
Inelastic if less than 1
Percentage Change:

(End value – Beginning Value)
* 100%
Beginning Value
Another way to determine
elasticity….
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The Total Revenue Test:
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Checking to see what happens with Total
Revenue in response to a price change will
also tell us about elasticity of demand.
Total Revenue = Price * Quantity
Total Revenue Test
It’s Elastic if:
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If Price

Or Price
and Total Revenue
and Total Revenue
Total Revenue Test
It’s Inelastic if:
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If Price
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Or Price
and Total Revenue
and Total Revenue