Elasticity of Demand

• Remember the law of demand says that if a price of a product goes up then the quantity demanded will go _________

• And vice versa• Sometimes price changes will really change

demand and other times price changes don’t affect demand as much

• A buyer’s responsiveness to a price change (whether demand really changes or doesn’t change very much) is called ____________________________

down

Elasticity of Demand

3 Factors That Determine A Product’s Elasticity

1. Degree of need (want or luxury item)2. Availability of substitutes3. Expense (does it take a large portion of your

income or a small one)Products can have either elastic or inelastic

demandI. When a price change causes a big change

in the quantity demanded, then that product has _________ ________.

Elastic Demand

Reasons why products have elastic demand (a,b,c on your outline)

a. It’s a luxury itemb. The product has many substitutesc. The product tends to be expensiveExamples---• Name brand clothing• Luxury sports car• i-phone

• The demand curve for an elastic product tends to be flat.

$

Q

D

10

2

4

2

Inelastic curve

P1

P2

D

Reasons why products have inelastic demand

• Tends to be a need

• Few or no substitutes

• Inexpensive/cheap

The demand curve for an elastic demand product tends to be ____________________

Examples: Gasoline, electricity, salt

Price

Quantity

2

4

Q2 Q1

Steep

II. When price change causes very little change in the quantity demanded, then that product has _______ __________a. Need it!b. The product has few, if any, substitutesc. It is cheap

Examples?• Gasoline • Electricity • Salt

The demand curve for an elastic demand product tends to be ____________________

Inelastic Demand

steep

ELASTIC OR INELASTIC?

• Inelastic• Elastic• Elastic• Inelastic• Inelastic• Inelastic • ?• Inelastic• Elastic

• ?• elastic

• Milk• MP3 players• Plastic surgery• Electricity • Cocaine• Coffee • College education• Gasoline• Gas at your favorite

station• Cigarettes • High speed internet