# 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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