Download price elasticity of demand

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
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Availability of Close Substitutes
Necessities vs. Luxuries
Proportion of Income
Time Horizon
D1
D1
Demand is more elastic when:
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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:
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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