1. Elasticity of Demand

2. Which demand curve is most sensitive to price changes?
Slope of Demand Curves
All demand curves do not have the same slope
Slope indicates responsiveness of buyers to a change in price
Which demand curve is most sensitive to price changes? D1 D1 D1
Price 10% => Qty Demanded ? (how much?)

3. PRICE ELASTICITY OF DEMAND
The change in quantity demanded in response to a change in price of a good
Ed = % ∆ Qty D
% ∆ P
If Price ↑ 10% & Qty Demanded ↓ 15% then Ed = ____
Ed > 1 is sensitive to price changes
Ed < 1 is not sensitive to price changes

4. 3 Types of Demand Elastic Demand Inelastic Demand Unit Elastic Demand
Quantity demanded responds strongly to price changes
Ed is > than 1 (Ed = % ∆ Qty D/ %∆ P)
Inelastic Demand
Quantity demanded does not respond strongly to price changes
Ed< than 1
Unit Elastic Demand
Quantity demanded changes the same percentage as price changes
Ed= 1

5. Determinants of Elasticity of Demand
Availability of Close Substitutes
Necessities vs. Luxuries
Proportion of Income
Time Horizon D1 D1

6. Demand is more elastic when:
If there are many close substitutes
if the good is a luxury
If it represents a larger % of budget
If the purchase can wait for a longer time period

7. Demand is more inelastic when:
If there are no close substitutes
If it is a necessity
If it represents a smaller % of budget
If the purchase is needed in a shorter time period

8. Estimating the Elasticity of Demand 3 Key Questions: 1. Subs. 2
Estimating the Elasticity of Demand 3 Key Questions: 1. Subs? 2. Necessity? 3. Expensive?

9. Price Elastic or Price Inelastic?
Gasoline
Soda
Price Inelastic
Need it now
No real substitutes
Price Elastic
Many substitutes
Heart Surgery
Table Salt
Price Inelastic
Necessity &
No real substitutes,
Short time period
Price Inelastic
Small proportion
of income, no good
substitute