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Elasticity of Demand 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 Price 10% => D1 Qty Demanded ? (how much?) 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 3 Types of Demand • 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 Determinants of Elasticity of Demand • • • • Availability of Close Substitutes Necessities vs. Luxuries Proportion of Income Time Horizon D1 D1 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 Demand is more inelastic when: • • • • If there are no close substitutes if the good is a necessity Good is a smaller % of budget the shorter the time period Estimating the Elasticity of Demand 3 Key Questions: 1. Subs? 2. Necessity? 3. Expensive? Price Elastic or Price Inelastic? Gasoline Price Inelastic Need it now No real substitutes Soda Price Elastic Many substitutes Heart Surgery Table Salt Price Inelastic Price Inelastic Necessity & No real substitutes, Short time period Small proportion of income, no good substitute