Download Elasticity of Demand - Flushing Community Schools

ELASTICITY OF DEMAND
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Understand what it is
Understand the types of elasticity
Understand the determinants
Understand how it can change revenue
Determine elasticity of products
• Which stretches or changes more—something that
is elastic or inelastic?
ELASTICITY OF DEMAND
• Main Ideas
• Demand elasticity is the extent to which a change in price
causes a change in the quantity demanded.
• Demand is elastic when a change in price causes a
relatively larger change in quantity demanded.
• Demand is inelastic when a change in price causes a
relatively smaller change in quantity demanded.
• Demand is unit elastic when a change in price causes a
proportional change in quantity demanded.
• To measure the elasticity of demand, compare the
percentage change in quantity demanded to the
percentage change in price.
ELASTIC DEMAND
• Refers to consumers being responsive to price
changes
• Demand curve very broad
INELASTIC DEMAND
• Consumers unresponsive to price changes
• Demand curve very steep
UNIT ELASTIC DEMAND
• When a price change results in a proportional
change in total expenditures, the demand is said to
be unit elastic.
• What is the difference between elastic and inelastic
demand?
• Elastic demand means that a change in price of something
like a food item causes a significant change in quantity
demanded. Inelastic demand means that a change in
price of something like medicine has a relatively small effect
on quantity demanded
TOTAL EXPENDITURE TEST
• Main Ideas
• The total expenditures test compares the direction of a
price change to the direction of change in total revenue or
total expenditures.
• With elastic demand, a change in price moves in the
opposite direction from the change in revenue.
• With unit elastic demand, there is no change in revenue,
regardless of the price change.
• With inelastic demand, the price and change in revenue
move in the same direction.
• Businesses often experiment with different prices for a new
product to determine its demand elasticity; this allows the
businesses to set a price that maximizes total revenues.
• What happens to the total expenditures for a
product with elastic demand when its price goes
up?
• Total expenditures decrease because people buy less of
the product when the price increases.
DETERMINANTS OF DEMAND
ELASTICITY
• Main Ideas
• Demand is usually inelastic if consumers cannot postpone
the purchase of a product.
• When acceptable substitutes are available for a product,
demand becomes more elastic.
• Demand for purchases that require a large portion of
income is generally more elastic than the demand for
purchases that require a smaller amount of income.
INCOME
• Small portion of income= inelastic demand
• Ex: Condiments, Pens
• Large portion of income=elastic demand
• Ex: Appliances, Houses
NUMBER OF SUBSTITUTES
• A lot of substitutes= elastic demand
• Ex: Chevy cars, Tide
• Few substitutes= inelastic demand
• Ex: Gas, Salt
TIME PERIOD
• Short time period = inelastic
demand
• Long time period = elastic
demand
CHECKING YOU UNDERSTANDING
• What type of demand elasticity do each of these
products have—and why:
• Soft drinks?
• elastic; because substitutes exist
• Salt?
• inelastic; because the percentage of a person’s total
budget devoted to the purchase of salt is relatively small
• Steak?
• elastic; because substitutes exist
• Electric power?
• inelastic; the purchase cannot be delayed in the short term