Elasticity of Demand

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					Elasticity of Demand
       Chapter 5
        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
                                   D1



  Price 10%           => Qty Demanded                   ?_ (how much?)
      PRICE ELASTICITY OF DEMAND
• The change in quantity demanded in response to a change in price

                          Ed = % ∆ Qty D
                                %∆P

 If Price ↑ 10% & Qty Demanded ↓ 15%, then Ed = ____

            Ed > 1 is sensitive to price changes (elastic)

            Ed < 1 is not sensitive to price changes (inelastic)
               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

                                         Elastic
              Inelastic                            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
       Price Elastic or Price Inelastic?
      Gasoline                      Soda

Price Inelastic
Necessity &                 Price Elastic
No real substitutes
                            Many substitutes



            Heart Surgery                   Table Salt

Price Inelastic
                                Price Inelastic
Necessity &
No real substitutes,            Small proportion
Short time period               of income, no good
                                substitute
             Worksheet #1
• Lesson 4, Activity 18

				
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