Elasticity of Demand Understand what it is Understand the types of elasticity Understand the determinants Understand how it can change revenue Determine elasticity of products

Which stretches or changes more—something that is elastic or inelastic?

Elasticity of Demand Main Ideas Demand elasticity is the extent to which a change in price causes a change in the quantity demanded. Demand is elastic when a change in price causes a relatively larger change in quantity demanded. Demand is inelastic when a change in price causes a relatively smaller change in quantity demanded. Demand is unit elastic when a change in price causes a proportional change in quantity demanded. To measure the elasticity of demand, compare the percentage change in quantity demanded to the percentage change in price.

Elastic Demand Refers to consumers being responsive to price changes Demand curve very broad

Inelastic Demand Consumers unresponsive to price changes Demand curve very steep

Unit Elastic Demand When a price change results in a proportional change in total expenditures, the demand is said to be unit elastic.

What is the difference between elastic and inelastic demand? Elastic demand means that a change in price of something like a food item causes a significant change in quantity demanded. Inelastic demand means that a change in price of something like medicine has a relatively small effect on quantity demanded

Total Expenditure Test Main Ideas The total expenditures test compares the direction of a price change to the direction of change in total revenue or total expenditures. With elastic demand, a change in price moves in the opposite direction from the change in revenue. With unit elastic demand, there is no change in revenue, regardless of the price change. With inelastic demand, the price and change in revenue move in the same direction. Businesses often experiment with different prices for a new product to determine its demand elasticity; this allows the businesses to set a price that maximizes total revenues.

What happens to the total expenditures for a product with elastic demand when its price goes up? Total expenditures decrease because people buy less of the product when the price increases.

Determinants of Demand Elasticity Main Ideas Demand is usually inelastic if consumers cannot postpone the purchase of a product. When acceptable substitutes are available for a product, demand becomes more elastic. Demand for purchases that require a large portion of income is generally more elastic than the demand for purchases that require a smaller amount of income.

Income Small portion of income= inelastic demand Ex: Condiments, Pens Large portion of income=elastic demand Ex: Appliances, Houses

Number of Substitutes A lot of substitutes= elastic demand Ex: Chevy cars, Tide Few substitutes= inelastic demand Ex: Gas, Salt

Time Period Short time period = inelastic demand Long time period = elastic demand

Checking you Understanding What type of demand elasticity do each of these products have—and why: Soft drinks? elastic; because substitutes exist Salt? inelastic; because the percentage of a person’s total budget devoted to the purchase of salt is relatively small Steak? Electric power?  inelastic; the purchase cannot be delayed in the short term