+ Demand Chapter 4 What is Elasticity of Demand? Section 3

+ What is Elasticity of Demand? Buying habits are affected by the type of product and importance to the consumer Elasticity of Demand-measure of how responsive consumers are to price changes Elastic-quantity demanded changes greatly as price changes Inelastic-quantity demanded changes little as price changes

+ Elasticity of Demand for Goods and Services Goods with substitutes have elastic demand since choices are available Needed goods without substitutes have inelastic demand Elasticity changes if substitutes created or goods taken of market Unit Elastic-same percentage change in price and quantity demanded Useful concept for determining elasticity of demand

+ What determines elasticity? 3 Factors 1 st Factor-Substitute Goods or Services If no substitute-inelastic If a substitute-elastic 2 nd Factor-Proportion of Income Expensive-Elastic Inexpensive-Inelastic 3 rd Factor-Necessity or Luxury Necessity-inelastic Luxury-elastic

+ Calculating Elasticity of Demand Knowing elasticity of demand tells sellers whether to cut prices If demand is elastic, price cuts might increase earnings If demand is inelastic, price cuts will not increase earnings Formulas used to calculate elasticity Is change in quantity demanded greater than change in price? Total Revenue Amount of money a company makes on a product Total Revenue=P (price) * Q (quantity) Total Revenue Test If total revenue increases after price drops, demand is elastic If total revenue decreases after price drops, demand is inelastic

+ Elasticity of Demand Step 1-Calculate change in demand Original quantity-new quantity over original quantity * 100 Step 2 –Calculate change in price Original price-new price over original price * 100 Step 3-Calculate elasticity Percentage change in quantity demanded over percentage change in price. Step 4-Test If the final number is greater than 1 the demand is elastic If the final number is less than 1 than the demand is inelastic

+ Vocabulary Elasticity of Demandmeasure of how responsive consumers are to price changes Elasticquantity demanded changes greatly as price changes Inelasticquantity demanded changes little as price changes Unit Elasticsame percentage change in price and quantity demanded