ELASTICITY OF DEMAND Are there some goods that you would always find money to buy, even if price increased greatly? Are there goods that you would cut back on or even stop buying altogether if the price were to rise slightly?

WHAT IS ELASTICITY  Economists describe the way that consumers respond to price change Dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls  Inelastic Demand for a good will not change despite a price increase  Elastic Demand for a good will change even after a small price change  A consumer with highly elastic demand for a good is very responsive to price changes.

FACTORS AFFECTING ELASTICITY  Why is the demand for some goods so much less elastic than other goods?  SUBSTITUTES If there are few substitutes for a good then even a price increase consumers will still buy the good (inelastic) With a wide choice of substitute goods price changes will lead consumers to buy less of one good and more of another (elastic)

FACTORS CONTUNIED  RELATIVE IMPORTANCE How much of their budget a consumer would spend on a good  If you spend a large part of your income on a good a price increase will force you to change your demand. You have to reduce consumption by a lot to keep your budget under control.  Cloths  shoelaces

FACTORS CONTUNIED  Necessities VS Luxuries Has a big impact on the elasticity but differs from person to person Goods a consumer will always buy even when the price increases Necessities (inelastic) Goods a consumer would buy less of if the price increased Luxury (elastic)

FACTORS CONT.  Change Over Time When prices change consumers need time to react and change their buying habits It takes time to find substitutes Because substitutes can not be found quickly demand is inelastic in the short term and more elastic over time  Gas