1. Elasticity of Demand
Chapter 5

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 must fall, but by what percent?

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

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
Number of Close Substitutes
Necessities vs. Luxuries
Proportion of Income (is it expensive)
Time Horizon (when do you need it?) D1
Elastic D1
Inelastic

6. Demand is more elastic when:
the larger the number of close substitutes
if the good is a luxury
Good is a larger % of budget
the longer the time period D1
Elastic

7. Price Elastic or Price Inelastic?
Gasoline
Soda
Price Inelastic
Necessity &
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

8. Worksheet #1
Lesson 4, Activity 18

9. Debt = 10 Trillion Debt = 15.2 Trillion SP500 +13.0% SP500 +0.0%
2010 Economy
Stock Market- good year
SP %
Unemployment fell from 10.0% to 9.8%
GDP growth %
Fed Funds Rate 0.00  0.00%
2011 Economy
Stock Market- unchanged
SP %
Unemployment fell from 9.8% to 8.6%
GDP growth %
Fed Funds Rate 0.00  0.00%
Debt =
15.2 Trillion