ECONOMICS CHAPTER 3, SECTION 3 Elasticity of Demand.

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Presentation transcript:

ECONOMICS CHAPTER 3, SECTION 3 Elasticity of Demand

I. Elasticity of Demand A. Elasticity of demand measures the degree to which changes in price change the quantity demanded. B. There are three types of elasticity of demand: 1. Elastic Demand 2. Inelastic Demand 3. Unit Elastic Demand

II. Elastic and Inelastic Demand ELASTIC DEMAND Small change in P causes large change in QD INELASTIC DEMAND Change in P causes small change in QD

II. Elastic and Inelastic Demand Unit Elastic=No change

III. Determinants of Elasticity ELASTIC DEMAND Luxury good/not a necessity Has readily available substitutes Takes a large portion of income INELASTIC DEMAND Necessity Few substitutes available Takes a small portion of income

IV. Examples ELASTIC DEMAND Plasma television INELASTIC DEMAND Salt

V. General vs. Specific Market Market can be a factor in determining elasticity Ex. Gasoline

VI. How elasticity is measured A. Total Revenue-The total income a business receives from selling its products. P x QD = TR

VI. How elasticity is measured B. Total revenue determines the elasticity of demand for a good or service.

VI. How elasticity is measured Elastic Demand P, TR Inelastic Demand P, TR

VI. How elasticity is measured C. Maximizing TR=the price that should be charged to achieve the highest revenue. D. Why would a business owner conduct a TR test?