Elasticity of Demand

Elasticity of Demand how responsive consumers are to price changes. Demand is either elastic or inelastic. Elastic: When a change in price leads to a larger change in the quantity demanded. Inelastic: When a change in price leads to little or no change in the quantity demanded.

Elastic Follows the Law of Demand. The price of Xbox One decreases 20%, and the quantity demanded increases by 30%. The item is elastic. The change in price changes the demand. The percentage change in quantity demanded is greater than the percentage change in price.

Inelastic Does not follow the Law of Demand. A change in price does not change the demand. Example: What item will people buy no matter the change in price? What item will you not buy no matter how cheap it is? Insulin. Diabetics need daily insulin injections to regulate blood sugar. If the price of insulin were to rise, diabetics would still need the same amount of insulin as they did before. If the price were to drop, they would not need any more insulin than their required dosage. The demand for insulin is inelastic because the quantity demanded remains relatively constant.

Factors that Affect Elasticity of Demand Availability of substitute Goods No Subs= inelastic Subs=elastic If the price of beef were to increase, consumers can eat chicken, pork or fish.

Necessities vs. Luxuries Necessity = goods that a person will always demand (eggs, milk, etc.) and will continue to buy regardless of a change in price Luxury = goods that a person may not demand should a price increase occur (steak, fine wine, etc.)

Calculating Elasticity of Demand Businesses calculate elasticity of demand to decide whether or not to make price cuts. If demand is elastic, price cuts could result in profit. If demand is inelastic, a price cut would not make a difference