Ch. 3—Elasticities

Elasticity How much does quantity demanded change when price changes? Synonyms: Responsiveness, Sensitivity

Examples of Elasticity Numbers Salt = 0.1 Coffee = 0.25 Cigarettes = 0.45 Restaurant meals = 2.3 Chevys = 4.0 Fresh tomatoes = 4.6

So what do these numbers mean?

Range of values for elasticity When between 0 and 1 = inelastic If you change the price, the quantity demanded does not change a lot

Range of values for elasticity When greater than 1 = elastic If you change the price, quantity demanded changes a lot

Range of values for elasticity When equal to 1, there is unit elastic demand

Range of values for elasticity When equal to 0 = perfectly inelastic Price changes do not affect quantity demanded

Range of values for elasticity When equal to infinity = perfectly elastic

What affects elasticity? Number and closeness of competing goods The easier it is to find a substitute for something, the more elastic

What affects elasticity? Definition of good Narrowly defined goods are more elastic

What affects elasticity? Necessities v. Luxuries Things that are not necessary (luxuries) are more elastic because you can live without them if price goes up Necessities are necessary, so you’ll still want them if price goes up

What affects elasticity? Length of Time Everything is more elastic over time, because people can change behavior over time

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