1. Elasticity of Demand
Econ 9/26

2. Warm Up
What is the difference between a change in quantity demanded and change in demand?

3. Demand Elasticity Imagine the following scenario:
You own a restaurant that is fully booked during the weekends. In mid-week, however, you rarely have enough bookings to stay open. To make more money during this slow period, you decide to cut dinner prices by 1/3 – from $15 to $10 – on Wednesdays and Thursdays. This results in an increase in quantity demanded from 100 to 140 dinners per day.
Was this a good business decision? Discuss

4. Demand Elasticity
Elasticity: how much a change in price causes a change in the quantity demanded (how sensitive a consumer is to a price change)
To calculate elasticity=
***Does not matter if the answer is positive or negative

5. Elastic Demand
Elastic: a change in price causes a relatively larger change in quantity demanded
Ex. Cookies, orange juice, broccoli
As price goes down from $1 to $0.75, the quantity demanded triples from 3 to 9 units
Elasticity of demand > 1

6. Inelastic Demand
Inelastic: a change in price causes a relatively smaller change in quantity demanded
Ex. Gasoline, certain drugs
As price goes down from $1.50 to $0.50, the quantity demanded only increases from 3 to 5 units
Elasticity of demand < 1

7. Unit Elastic
Unit Elastic: a change in price causes a proportional change in quantity demanded
As price goes down from $4 to $2, the quantity demanded only increases from 4 to 2 units
Elasticity of demand = 1

8. Practice Problems
Calculate the following price elasticities using the equation
Based on the coefficient of elasticity, which product is elastic, inelastic, and unit- elastic?
1. As the price of cheese increases by 30%, the quantity demanded decreases by 15%.
2. As the price of airfare decreases by 10%, the quantity of tickets demanded increases by 40%.
3. As the price of sunglasses increases by 25%, the quantity demanded decreases by 25%.

9. Practice Problems
As the price of cheese increases by 30%, the quantity demanded decreases by 15%.
= = 1 2 = Elasticity of Demand < 1 so it is inelastic
2. As the price of airfare decreases by 10%, the quantity of tickets demanded increases by 40%.
= = 4 1 = Elasticity of Demand > 1 so it is elastic
3. As the price of sunglasses increases by 25%, the quantity demanded decreases by 25%.
= = 1 1 = Elasticity of Demand = 1 so it is unit elastic

10. Determinants of Demand Elasticity
Can the purchase be delayed?
If not  inelastic demand
Is it necessary?
If so inelastic demand
Are there adequate substitutes available?
Does the purchase use a large portion of income?
***This is only GENERALLY speaking