1. Elasticity

2. Elastic vs. Inelastic Demand You know that changes in price cause changes in Quantity Demanded. When price goes up, quantity demanded goes down. When price goes down, quantity demanded goes up.

3. Elastic vs. Inelastic Demand But the size of the change is different for different kinds of products. For some products, a change in price will cause a very large change in quantity demanded. For other products, a change in price will cause only a small change in quantity demanded. This is the difference between elastic and inelastic demand

4. Elastic Demand: When a change in price causes a big change in Quantity demanded.

5. Graph of Elastic Demand Elastic Demand is shown by drawing a very flat demand curve.

6. Inelastic Demand: When a change in price causes only a little change in Quantity demanded.

7. Graph of Inelastic Demand Inelastic Demand is shown by drawing a very vertical demand curve.

8. But what kinds of products are elastic or inelastic?

9. Determining Elasticity of Demand The following 4 questions can be used to determine if a product is likely to be elastic or not. The more times the answer is “yes,” the more likely it is that demand is elastic.

10. Question 1: Are substitutes available? Substitutes are products that can be used in place of each other. If there are substitutes available for a product, demand tends to be… ELASTIC If there are few or no substitutes available, demand tends to be inelastic.

11. Question 1: Are substitutes available? Example: A particular brand of butter Are there substitutes available for particular brands of butter? YES There are other brands available, and there is also margarine. The existence of substitutes means that demand is more likely to be… ELASTIC If no substitutes are available, as with home electricity, demand tends to be inelastic.

12. Question 2: Is it a “want” (aka - “luxury item”) instead of a need? If the product is a “want” or “luxury item,” demand tends to be… ELASTIC. If the product is a need, demand tends to be inelastic.

13. Question 2: Is it a “want” (aka - “luxury item”) instead of a need? Example: A blue-ray disc player Is a blue-ray player a want/luxury item, or a need? A WANT/LUXORY ITEM (people won’t die without blue-ray players) Since blue-ray players are wants rather than needs, demand tends to be… ELASTIC Demand for needs, like home heating, tend to be inelastic.

14. Question 3: Can people wait to buy it? If people can wait to buy it, demand tends to be… ELASTIC. If people cannot wait to buy it, demand tends to be inelastic.

15. Question 3: Can people wait to buy it? Example: New carpeting Can people wait to buy new carpeting? YES Since people can wait to buy new carpeting, demand for new carpeting tends to be… ELASTIC Demand for things people cannot wait to buy, like gasoline, tend to be inelastic.

16. Question 4: Is it a “Big Ticket Item?” “Big ticket” items are relatively expensive items like furniture, laundry machines, and of course cars and homes. If the product is a “big ticket item,” demand tends to be… ELASTIC If the product is not a big ticket item, demand tends to be inelastic.

17. Question 4: Is it a “Big Ticket Item?” Example: A new dish washing machine. Is a new dish washing machine a big ticket item? YES Since dish washing machines are big ticket items, demand for them tends to be… ELASTIC Demand for relatively less expensive items, like socks, tends to be inelastic.

18. Got it!