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Section 3
Elasticity of Demand
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3. What Is Elasticity of Demand?
Elasticity of demand is the relationship between the percentage change in quantity demanded and the percentage change in price.
Demand for a good can be elastic, inelastic, or unit-elastic.
Elastic when the percentage change in quantity demanded is greater than the percentage change in price.
Inelastic is when the percentage change in quantity demanded is less than the percentage change in price.
Unit-elastic is when the percentage change in quantity demanded is the same as the percentage change in price.
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4. What Is Elasticity of Demand? (cont.)
Demand for a good can be elastic, inelastic, or unit- elastic.
Elastic when the percentage change in quantity demanded is greater than the percentage change in price.
Inelastic is when the percentage change in quantity demanded is less than the percentage change in price.
Unit-elastic is when the percentage change in quantity demanded is the same as the percentage change in price.
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5. What Determines Elasticity of Demand?
Four factors affect the elasticity of demand:
Number of substitutes.
Luxuries versus necessities.
Percent of income spent on the good
Time
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6. An Important Relationship Between Elasticity and Total Revenue
Elastic demand and an increase in price lead to a decrease in total revenue.
Elastic demand and a decrease in price lead to an increase in total revenue.
Inelastic demand and an increase in price lead to an increase in total revenue.
Inelastic demand and a decrease in price lead to a decrease in total revenue.
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