Elasticity of Demand Chapter 4 Section 3

Elasticity of Demand – dictates how drastically buyers will cut back or increase their demand of a good when the price rises or falls –Inelastic – will continue to buy –Elastic – buy less with a price increase

Elastic – Will buy less of, sensitive to price changes In Dollars Quantity Demand

Inelastic – keep buying despite price change Quantity Demanded In Dollars

Mountain Dew –1.50 increased to 2.00 –Still buy the same amount? Magazines –5.00 to –Buy the same amount?

Elastic Demand curve –Price goes from 2.00 – 2.50 –Demand goes down by 1

Factors If there are few substitutes then even when prices rise you will still purchase the good (inelastic) –Life saving medicine Many substitutes will make a product (elastic) –Apples

Necessity vs. luxury –Varies person to person –Milk for example (necessity) Many families purchase milk regardless of price Demand for milk is inelastic –Steak (luxury) Families may cut back if steak jumps 50% Demand for milk is elastic

Demand over time Consumers do not always react quickly to a change in price –Takes time to find substitutes Inelastic –Over time the demand becomes elastic

1970’s Oil crunch –People had large vehicles –Price of gasoline jumped –Could not find substitutes Inelastic –Over time people … Smaller cars, car pool, fuel efficient vehicles elastic

Total revenue and elastic demand Total revenue – amount of money the company receives by selling it’s goods –(Price of the good)*(quantity sold) Slices of PizzaQuantity Demanded Total Revenue.50300$ $ $ $ $ $150

Total revenue and inelastic demand Higher mark up in price will make up for the lack of goods being sold If the company decreases the price they will lose revenue Slices of PizzaQuantity Demanded Total Revenue.50300$ $ $ $ $ $150

Elastic Demand (apples) As the price is raised… Total revenue falls

Elastic Demand (apples) Total revenue rises As the price is lowered

Inelastic Demand (medicine) As price is lowered Total revenue falls

Inelastic Demand (medicine) As prices are raised Total Revenue rises