Elasticity of Demand Chapter 5

Which demand curve is most sensitive to price changes? Slope of Demand Curves All demand curves do not have the same slope Slope indicates responsiveness of buyers to a change in price Which demand curve is most sensitive to price changes? D1 D1 D1 Price 10% => Qty Demanded must fall, but by what percent?

PRICE ELASTICITY OF DEMAND The change in quantity demanded in response to a change in price Ed = % ∆ Qty D % ∆ P If Price ↑ 10% & Qty Demanded ↓ 15%, then Ed = ____ Ed > 1 is sensitive to price changes (elastic) Ed < 1 is not sensitive to price changes (inelastic)

3 Types of Demand Elastic Demand Inelastic Demand Unit Elastic Demand Quantity demanded responds strongly to price changes Ed is > than 1 (Ed = % ∆ Qty D/ %∆ P) Inelastic Demand Quantity demanded does not respond strongly to price changes Ed< than 1 Unit Elastic Demand Quantity demanded changes the same percentage as price changes Ed= 1

Determinants of Elasticity of Demand Number of Close Substitutes Necessities vs. Luxuries Proportion of Income (is it expensive) Time Horizon (when do you need it?) D1 Elastic D1 Inelastic

Demand is more elastic when: the larger the number of close substitutes if the good is a luxury Good is a larger % of budget the longer the time period D1 Elastic

Price Elastic or Price Inelastic? Gasoline Soda Price Inelastic Necessity & No real substitutes Price Elastic Many substitutes Heart Surgery Table Salt Price Inelastic Necessity & No real substitutes, Short time period Price Inelastic Small proportion of income, no good substitute

Worksheet #1 Lesson 4, Activity 18

Debt = 10 Trillion Debt = 15.2 Trillion SP500 +13.0% SP500 +0.0% 2010 Economy Stock Market- good year SP500 +13.0% Unemployment fell from 10.0% to 9.8% GDP growth +3.0% Fed Funds Rate 0.00  0.00% 2011 Economy Stock Market- unchanged SP500 +0.0% Unemployment fell from 9.8% to 8.6% GDP growth +1.5% Fed Funds Rate 0.00  0.00% Debt = 15.2 Trillion