Transcript Elasticity - WordPress.com

ELASTICITY
UNIT 2
PRICE ELASTICITY OF DEMAND
 Elasticity measures consumers sensitivity to price
changes
 The more sensitive consumers are to prices, the more
the quantity they will buy will change when prices
change
ELASTIC DEMAND
 VERY sensitive to changes in price
 Small changes in price can cause big changes in quantity demand
 Luxuries
 Items with lots of substitutes
 Lots of time to find substitutes
 Takes a LARGE portion of income to pay for goods
INELASTIC DEMAND
 NOT VERY sensitive to changes in price
 BIG changes in price can cause small changes in quantity demand
 Necessities
 Items with few of substitutes
 Very little time to find substitutes
 Takes a SMALL portion of income to pay for goods
FORMULAS FOR ELASTICITY
 Price Elasticity of Demand
 Change in QD in response to change in price
 E = %∆QD/% ∆ P
 Always take absolute value of answer (no negative answers)
If E>1 demand is elastic
If E<1 demand is inelastic
If E = 1demand is unit elastic
EXAMPLE
 If the price of VOSS water increases by 15%, Kate’s
quantity demanded will decrease by 5%
 What is her coefficient of elasticity?
 Is her demand elastic, inelastic or unit elastic?
INCOME ELASTICITY OF DEMAND
 Change in QD in response to a change in income
 E = % ∆QD/% ∆Y
 Y is income
 Positive coefficient = normal good
 Negative coefficient = inferior good
 Normal good = goods that we buy more of as income
increases
 Necessities
 Luxuries
 Inferior good = goods we buy less of as income
increases
EXAMPLE
 Orlando gets a 12% raise at work and his quantity demand for
ramen noodles decreases by 6%
 What is his coefficient of elasticity?
 Is this a normal or inferior good?
CROSS PRICE ELASTICITY OF DEMAND
 Change in QD of good A in response to a change in price of good B
 E = % ∆QDa/% ∆Pb
 Positive coefficient = substitute good
 Negative coefficient = complementary good
EXAMPLE
 Bobby will buy 8% more spaghetti sauce when the price of
spaghetti decreases by 4%
 What is his coefficient of demand?
 Is this a substitute good or a complementary good?
Totally sensitive to
changes in price. Will buy
any amount at one price
E=∞
Not sensitive at all to
changes in price. Will buy
only one amount no
matter the price.
E=0