Elasticity of Demand Pgs. 101 – 107 Chapter 4.3 Elasticity of Demand Pgs. 101 – 107

Demand Elasticity Elasticity – how much does quantity change when price changes Think in terms of percentages Did quantity change relatively more, less or the same as price? Elastic demand A small change in price leads to a relatively large change in quantity demanded Price goes up by 10%, quantity demanded goes down by 50% Figure 4.5 A pg. 103

Cont. Inelastic demand Unit Elastic Demand A change in price leads to a relatively smaller change in quantity demanded Price goes up 50% and quantity demanded goes down 10% Figure 4.5 B Unit Elastic Demand A change in price leads to a relatively similar change in quantity demanded Price goes up 25%, quantity demanded goes down 25% Figure 4.5 C

Total expenditures Test Determining total expenditures Multiply the price by the quantity demanded at the original and new price This tells us expenditures Price goes up + Expenditures go up = inelastic Price goes up + Expenditures go down = elastic Price goes up + Expenditures stay the same = unit elastic Elasticity & Profits The more inelastic your good the higher you can raise prices

Determinants of Demand Elasticity Can the purchase be delayed? If you need this medicine to live you don’t really care about the price = inelastic The longer you can wait the more elastic the good becomes Are Adequate Substitutes Available? If you’re thirsty and the price of pop triples might you decide to by water? The more alternatives there are the more elastic the item is. How many alternatives are there for insulin?

Cont. Does the Purchase use a large portion of income? How much is a meal at McDonald’s to Bill Gates? What about a homeless person? The larger the percentage of your income the item is the more elastic it becomes.