1. How sensitive is demand to price changes?
Elasticity of Demand
How sensitive is demand to price changes?

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

3. ELASTICITY OF DEMAND
Elasticity of demand (Ed) measures the sensitivity of quantity demanded in response to a change in price:
Ed = % change Qty D
% change Price

4. Elastic Demand Curves Elastic Demand
Demand is sensitive to price changes
Demand Curves are flat
Ed > 1
A % ↑ Price leads to a greater % decline in Qty Demanded D1 Px
Qty
Ed = % change Qty D
% change Price

5. Example: Elastic Demand Curve.
10% rise in Price
causes a Greater
than 10 % decline
in Qty D
Ed = % change Qty D
% change Price
Ed = 1.5

6. Inelastic Demand Curves
Demand NOT sensitive to price changes
Curves are STEEP
Ed < 1
A % ↑ Price leads to a SMALLER % decline in Qty Demanded D1 Px
Qty
Ed = % change Qty D
% change Price

7. Example: Inelastic Demand Curve
↑% Price changes
Leads to a smaller
% decline in Qty D
+100%
Ed = 0.1
Quantity
Ed = % change Qty D
% change Price
-10%

8. Elasticity depends on:
Number of close substitutes
more substitutes => more elastic demand
Whether the good is considered a necessity
Necessities tend to be inelastic, luxury goods are elastic
Proportion of income spent
larger proportion of income more elastic
Time period
Longer the time period => the more elastic demand is

9. Price Elastic or Price Inelastic?
Gasoline
Soda
Price Inelastic
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

10. Total Revenue & Profit Total Revenue = Price X Quantity
Profit = Total Revenue - Expenses
Elasticity determines the effect on total revenue
Total Revenue => when Prices elastic goods
Total Revenue => when Prices inelastic goods

11. Elastic Demand Raising prices will lower total revenue! $200 $150
$200
$150
Raising prices will
lower total revenue!

12. Elasticity Worksheet Elastic Demand Inelastic Demand Total Revenue =Px
Qty D1 Px
Qty
Total Revenue =
Price * Quantity

13. GDP