Transcript Elasticity of Demand

ECONOMICS
CHAPTER 3, SECTION 3
Elasticity of Demand
I. Elasticity of Demand


A. Elasticity of demand measures the
degree to which changes in price
change the quantity demanded.
B. There are three types of elasticity
of demand:
1. Elastic Demand
2. Inelastic Demand
3. Unit Elastic Demand
II. Elastic and Inelastic
Demand
ELASTIC DEMAND
INELASTIC
DEMAND
 Small change in P
causes large change  Change in P causes
in QD
small change in QD
II. Elastic and Inelastic
Demand

Unit Elastic=No change
III. Determinants of Elasticity
ELASTIC DEMAND
 Luxury good/not a
necessity
 Has readily
available
substitutes
 Takes a large
portion of income
INELASTIC
DEMAND
 Necessity
 Few substitutes
available
 Takes a small
portion of income
IV. Examples
ELASTIC DEMAND
 Plasma television
INELASTIC
DEMAND
 Salt
V. General vs. Specific Market


Market can be a factor in determining
elasticity
Ex. Gasoline
VI. How elasticity is measured

A. Total Revenue-The total income a
business receives from selling its
products.
P x QD = TR
VI. How elasticity is measured

B. Total revenue determines the
elasticity of demand for a good or
service.
VI. How elasticity is measured
Elastic Demand
Inelastic Demand
P,
TR
P,
TR
P,
TR
P,
TR
VI. How elasticity is measured


C. Maximizing TR=the price that
should be charged to achieve the
highest revenue.
D. Why would a business owner
conduct a TR test?