Elasticity of Demand Chapter 4 Section 3

Demand Elasticity Demand Elasticity: the extent to which a change in P causes a change in the Q demanded 3 types 1. Elastic = small change in P causes a large change in Q demanded example = fresh fruit

3. Unit = % change in P = % change in Q demanded 2. Inelastic = a change in P causes a smaller change or no change in Q demanded Example: table salt or gasoline 3. Unit = % change in P = % change in Q demanded

Total Expenditures Test Multiply the price by the quantity Change in Price Expenditure Elastic   Unit No change Inelastic

Specific vs. General Market Examples: Specific: Exxon Gas Station If P increases, people would go somewhere else, therefore it is elastic (flexible) General: All Gas Stations If P increases, people will have to pay the increase, therefore it is inelastic (nonflexible)

Determinants of Demand Elasticity If 2 or more NO = usually inelastic If 2 or more YES = usually elastic

Determinants of Elasticity Gas from Exxon Gas in general Needed Medicine Fresh Oranges New shoes Utility service Rent or Mortgage Can the Purchase be Delayed? yes Are adeq. Substitutes available? no Does the purchase use a large part of income? Type of elasticity Elastic