04 Elasticity Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

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04 Elasticity Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity LO1 4-2

Perfectly inelastic demand Extreme Cases P D1 Perfectly inelastic demand (Ed = 0) Perfectly inelastic demand LO1 4-3

Extreme Cases Perfectly elastic demand P D2 Perfectly elastic demand (Ed = ∞) Perfectly elastic demand LO1 4-4

Determinants of Elasticity of Demand Substitutability More substitutes, demand is more elastic Proportion of Income Higher proportion of income, demand is more elastic Luxuries vs. Necessities Luxury goods, demand is more elastic Time More time available, demand is more elastic LO1 4-5

Price Elasticity of Supply Measures sellers’ responsiveness to price changes Elastic supply, producers are responsive to price changes Inelastic supply, producers are not responsive to price changes LO3 4-6

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