Chapter 4.3 notes Demand Elasticity

HOW MUCH a change in P causes a change in QdHOW MUCH a change in P causes a change in Qd Elastic – when a change in P causes a relatively larger change in Qd. Ex: green beans, corn, tomatoes, etc.Elastic – when a change in P causes a relatively larger change in Qd. Ex: green beans, corn, tomatoes, etc.

cont’d Inelastic – a change in P causes a relatively smaller change in the quantity demanded. Ex: table salt, gasInelastic – a change in P causes a relatively smaller change in the quantity demanded. Ex: table salt, gas Unit Elastic – a given change in price causes a proportional change in quantity demanded.Unit Elastic – a given change in price causes a proportional change in quantity demanded.

Calculating Demand Elasticity Demand Elasticity = %ΔQd %ΔP %ΔP %ΔP %ΔP If the numerator is > denominator = elastic If the denominator is > numerator = inelastic

Total Expenditures Test TE= P x QdTE= P x Qd If demand curve is elastic – when P down, TE up. (inverse)If demand curve is elastic – when P down, TE up. (inverse) If the demand curve is inelastic – P down, TE down and vice versaIf the demand curve is inelastic – P down, TE down and vice versa If the demand curve is unit elastic – P down OR up and NO change in TEIf the demand curve is unit elastic – P down OR up and NO change in TE

Total Expenditure Demand Quantity Q P 0 Price P × Q = $400 (TE) $4 100 When the price is $4, consumers will demand 100 units, and spend $400 on this good.

How TE Changes When Price Changes: Inelastic Demand Demand Quantity 0 Price TE = $100 Quantity 0 Price TE = $240 Demand $1 100 $3 80 An Increase in price from $1 to $3 … … leads to an Increase in TE from $100 to $240

How TE Changes When Price Changes: Elastic Demand Demand Quantity 0 Price TE = $200 $4 50 Demand Quantity 0 Price TE = $100 $5 20 An Increase in price from $4 to $5 … … leads to an decrease in TE from $200 to $100 Note that with each price increase, the Law of Demand still holds – an increase in price leads to a decrease in the quantity demanded. It is the change in TR that varies!

Determinants of D Elasticity Necessities vs. Luxuries – Necessities usually inelasticNecessities vs. Luxuries – Necessities usually inelastic Substitutes goods/services - If no sub, usually inelasticSubstitutes goods/services - If no sub, usually inelastic Portion of income – if uses a large portion of income, usually elasticPortion of income – if uses a large portion of income, usually elastic

Rank the following items from most elastic to least elastic Honda AccordHonda Accord BeefBeef European vacationEuropean vacation SaltSalt Dijon mustardDijon mustard steaksteak

Results…? European VacationEuropean Vacation Honda AccordHonda Accord Dijon mustardDijon mustard SteakSteak BeefBeef saltsalt