Mr. Marinello * Fall 2012 * Chippewa Valley Elasticity of Demand Mr. Marinello * Fall 2012 * Chippewa Valley

Elasticity of Demand The measure of how responsive consumers are to changes in prices Demand is either elastic or inelastic Elastic: When a change in price, either up or down, leads to a large change in the quantity demanded. Inelastic: When a change in price leads to a small change in the quantity demanded.

Elastic Restaurant Meals I don’t need to eat in a restaurant. There are lots of options for dinner time. If the price of going out to a restaurant goes up I will simply eat in. The demand for restaurant meals can fluctuate with price. It can stretch, there for it is elastic.

Inelastic Insulin Diabetics need daily insulin injections If the price of insulin were to rise, diabetics would still need the same amount of insulin as they did before. If the price were to drop, they would not need any more insulin than their required dosage. The demand for insulin is inelastic because the quantity demanded remains relatively constant.

Unit Elasticity When the percentage change in price and quantity demanded are the same. A 10% increase in the price would cause exactly a 10% drop in quantity demanded

Factors that Affect Elasticity of Demand Availability of substitute Goods No Substitutes = inelastic No sub exists for insulin, so consumer’s demand is inelastic even when the price goes up. Substitutes = elastic If the price of beef shoots up, consumers can eat chicken, pork or fish.

Factors that Affect Elasticity: Proportion of Income How much of your budget/income do you spend on the good? Significant amount of income: a small increase in price of the good will decrease your ability to purchase it, thus your demand will go down by a larger % than the % increase in price (elastic) Photography as a hobby—10% of your income

Insignificant amount of income: a small increase in price will not decrease your ability to purchase it. The price of pens rises by 5%. You spend such a little amount on pens; you would/could easily pay for the increase.

Necessities vs. Luxuries Necessity = goods that a person will always demand (eggs, milk, etc.) and will continue to buy regardless of a change in price Luxury = goods that a person may not demand should a price increase occur (steak, fine wine, etc.)

Calculating Elasticity of Demand Businesses calculate elasticity of demand to decide whether or not to make price cuts. If demand is elastic, price cuts could result in profit. If demand is inelastic, a price cut would not make a difference