Price Elasticity of Demand

What do you think the relationship is between the price of these goods and services and consumers’ behavior? Prescription eyewear Car battery Dental care Pain Medication Gasoline Long-distance phone calls

Elasticity Refers to price responsiveness The measure of the price elasticity of demand is how much consumers respond to a given change in price.

Elastic Demand A rise or fall in the price of a product GREATLY affects the amount which people are willing to buy. The good and/or service is not a major necessity. There are several substitutes for the specific good/service. Example of an Elastic Good o Meals at a restaurant o $15.99 Chicken Alfredo at Olive Garden o Substitute for a cheaper meal o Cook at home Mathematically, elastic goods and services have a price elasticity of demand, greater than 1.

Inelastic Demand Demand is not affected by changes in price. There is not enough flexibility in the demand for the good and/or service. The good/service is a MAJOR necessity. There are no satisfactory substitutes for the specific good/service. o Ex: Gasoline for automobiles. o Regardless of the price, people still demand the same amount of gasoline every week. Mathematically, inelastic goods and services have a price elasticity of demand that is less than 1.

What determines price elasticity of demand? 1. Existence and similarity of substitutes o More substitutes, more responsive consumers will be to a change in price. o Ex: Diet Coke/Diet Pepsi 2. Percentage of a person’s total budget devoted to the purchases of that good o If you do not spend much of your total budget on a particular good, you will probably not often notice increases in the price of that good. 3. Time allowed for the consumer to adjust to the price change. o Takes a longer time to adjust to a new price o Longer time needed…greater price elasticity of demand