Elasticity of demand Elasticity refers to how much quantity demanded changes when the price of a...

Elasticity of demand

Elasticity refers to how much quantity

demanded changes when the price of a

good changes.Its sensitivity to price.

Inelastic Demand

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: Gasoline Electricity Water

Elastic Demand

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: Candy Clothing Specific brands Movie tickets

Unitary Elasticity The % change in price equals the

% change in quantity demanded

3 Determinants of elasticity: 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 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

P P

Q Q

P2

P1

Q2 Q1

P2P1

Q2 Q1

Inelastic Elastic

Time and its impact? 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 1Inelastic if less than 1

Percentage Change: (End value – Beginning Value)

Beginning Value* 100%

Another way to determine elasticity…. The Total Revenue Test:

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 TestIt’s Elastic if:

If Price and Total Revenue

Or Price and Total Revenue

Total Revenue TestIt’s Inelastic if:

If Price and Total Revenue

Or Price and Total Revenue