1. Elasticity

2. Elasticity of Demand
Elasticity of demand is a measure of how much quantity demanded changes in response to changes in price.

3. % change in quantity % change in price
Elasticity
% change in quantity % change in price

4. Elasticity
Elastic: A product is elastic when % change in quantity demand is greater than % change in price.
Demand for the product “reacts” to the price change by “bending” easily. Much like a rubber band easily bends when you push on it very little.

5. Elasticity
Products that are elastic are usually products that you can do without (luxuries) or products for which there are a lot of substitute goods
Examples
Car stereos
movie tickets
Hot Dog Buns

6. Elasticity
Inelastic: A product is said to be inelastic if % change in quantity demand is less than % change in price.
Demand for the product does not “bend” very easily. Much like pushing on a brick wall or a text book.

7. Elasticity
Products that are inelastic are usually things we need to survive or those things for which there are not many substitute goods.
Examples:
Gas
Bread
Some medicines

8. Elasticity
Unitary Elastic (or Unit Elastic): A product is said to be unit elastic is % change in quantity demand is equal to % change in price.

9. Factors that Affect Demand Elasticity
Necessity or Luxury
Necessities tend to be inelastic
Luxuries tend to be very elastic

10. Factors that Affect Demand Elasticity
Availability of Substitutes
The more readily available the more elastic a good is
Example: If the price of tickets to concerts becomes too high. People will go to the movies instead.

11. Factors that Affect Demand Elasticity
Relative Importance
How much of your income is devoted to the good?
If it is a high percentage, then a small change in price will probably effect demand greatly
If it is a small percentage, then a change in price might not even be noticed

12. Factors that Affect Demand Elasticity
Time
Elasticity may change as time passes.
Some items are inelastic in the short term, but elastic in the long term
In fact, time makes all products elastic
One example might be gasoline. How?

13. Elasticity Reminders Inelastic = <1 Unit Elastic = 1

14. Elasticity of Supply
Is a measure of how quantity Supplied responds to changes in price.
Operates exactly like Elasticity of Demand
Inelastic - price changes have little of no effect on supply
Elastic – price changes have dramatic effect of supply

15. Factors that Affect Supply Elasticity
The biggest factor in determining the elasticity of the supply of a product is Time.
In specific, how much time will it take to shift from making one product to something else.
If it is easy to shift, the supply will be elastic.
If it is hard to shift, the supply will be inelastic.
Example?

16. Factors that Affect Supply Elasticity
However, just like demand, in the long run, supply for all products is elastic.