Elasticity of Demand Unit 4.3

What is Elasticity of Demand? Elasticity is a measure of the amount of change in demand due to a change in price. How responsive are consumers to price changes? Elastic Inelastic Unit Elastic

What Determines Elasticity? Substitute Goods or Services – The greater the availability of substitutes, the higher the elasticity Proportion of Income – The higher the proportion of income, the higher the elasticity (ie. The more of your paycheck it costs, the greater the elasticity, or in other words, you are less likely to increase spending) Necessity vs Luxury – Necessities are by definition, more inelastic, because you need them, while luxuries are more elastic.

Calculating Elasticity Elasticity of demand = %Change in Quantity Demanded/%Change in Price Ed = [(Q1-Q2)/Q1]/[(P1-P2)/P1] Midpoint Formula Ed = [(Q2-Q1)/(Q1+Q2)/2]/[(P2-P1)/(P1+P2)/2] If the result is: Ed>1 = Elastic Ed<1 = Inelastic Ed=1 = Unit Elastic

Total Revenue Test Total revenue = Price*Quantity At what point(s) will revenue be maximized?