Topic 4.3 Elasticity

3.3 Elasticity of Demand
Objectives
1. Explain how to calculate elasticity of demand.
2. Determine elasticity of demand from a demand schedule and a demand curve.
3. Identify factors that affect elasticity.

Are there some goods that you would buy no matter the price? Are there other goods that you would not buy if the price changed a little?

Elasticity of Demand – A measure of how consumers react to a change in price.

Inelastic – Describes demand that is NOT sensitive to a change in price.

EX: Gas, medicine, milk

Elastic – Describes demand that is very sensitive to a change in price.

EX: Restaurant meals, foreign travel, specific brands of toothpaste and pizza slices, potato chips





Graphic Examples
Elastic Demand (Chips) Inelastic demand (Gas)







Calculating elasticity of demand

Elasticity of demand = Percentage change in quantity demanded
Percentage change in price

Percentage change = Original number – New number
Original number



Calculation:
If the elasticity is greater than 1, then it is elastic
If the elasticity is less than 1, then it is inelastic
If elasticity is equal to 1, then it is called unitary elastic

Elastic Demand
% change in Qd = 10-20 = 1
10

% change in P = 4-3 = (1/4)
4

Elasticity = % change in Qd = 1 = 4, which is greater than one so gas is inelastic
% change in P (1/4)

Inelastic Demand
% change in Qd = 10-15 = (5/10) = (1/2)
10


% change in P = 6-2 = (4/6) =(2/3)
6

Elasticity = % change in Qd = (1/2) = (3/4)
% change in P (2/3)

(3/4) is less than one so chips are elastic

Four Factors Affecting Elasticity of Demand
1. Availability of substitutes - If there are few subs for a good, then if the price rises greatly, you still might buy it.

EX: Your favorite concert group and Aquafresh toothpaste

2. Relative importance - What percentage of your budget do you spend on goods and services?

EX: ½ your budget goes to clothes or the increase of price in toothpicks

3. Necessities vs. luxuries
i. Necessities tend to inelastic
EX: milk and medicine

ii. Luxuries tend to be elastic
EX: Steak and lobster dinners

4. Change over time - You need time to find subs for goods/services. So demand in short-run maybe inelastic and more elastic in long-run

EX: gas in the Summer of 2008