Elasticity of Demand

Slope of Demand Curves All demand curves do not have the same slope Slope indicates responsiveness of buyers to a change in price D1D1 D1D1 D1D1 Which demand curve is most sensitive to price changes? Price 10% => Qty Demanded ? (how much?)

PRICE ELASTICITY OF DEMAND The change in quantity demanded in response to a change in price of a good If Price ↑ 10% & Qty Demanded ↓ 15% then E d = ____ E d > 1 is sensitive to price changes E d < 1 is not sensitive to price changes E d = % ∆ Qty D % ∆ P

3 Types of Demand Elastic Demand –Quantity demanded responds strongly to price changes –E d is > than 1 (E d = % ∆ Qty D/ %∆ P) Inelastic Demand –Quantity demanded does not respond strongly to price changes –E d < than 1 Unit Elastic Demand –Quantity demanded changes the same percentage as price changes –E d = 1

Determinants of Elasticity of Demand Availability of Close Substitutes Necessities vs. Luxuries Proportion of Income Time Horizon D1D1 D1D1

Demand is more elastic when: the larger the number of close substitutes if the good is a luxury Good is a larger % of budget the longer the time period

Estimating the Elasticity of Demand 3 Key Questions: 1. Subs? 2. Necessity? 3. Expensive?

Price Elastic or Price Inelastic? Soda Heart Surgery Table Salt Gasoline Price Inelastic Need it now No real substitutes Price Inelastic Necessity & No real substitutes, Short time period Price Elastic Many substitutes Price Inelastic Small proportion of income, no good substitute