Demand Elasticity

Chapter 4.3

Elasticity

The measure of responsiveness that tells us how quantity responds to a change in price

Demand Elasticity

The extent to which a change in price causes a change in the quantity demanded

Consumer sensitivity

Elastic A given change in

price causes a relatively larger change in quantity demanded

Fresh Vegetables More is bought in

summer when cheaper

Inelastic A given change in

price causes a relatively smaller change in the quantity demanded

Paper clips

Unit Elastic

A given change in price causes a proportional change in quantity demanded

Percent change in price is equal to percent change in quantity

To Determine Elasticity

Ask yourself the following questions:1. Can the purchase be delayed?2. Are adequate substitutions

available3. Does the purchase use a large

portion of income4. ?Brand loyalty?

What do you think the relationship is between the price of these goods and

services and consumers’ behavior?

Prescription eyewear Car battery Dental care Pain medication Gasoline

Total Expenditures Test Multiply the price of a product by the

quantity demanded for any point along the demand curve

P x Q If price goes up, but expenditures goes

down it will be elastic If price goes up and expenditures goes up it

will be inelastic If price goes up and expenditures stay the

same it is unit elastic

Work together with your table groups! You are managers of a rock band and

plan to give a concert in an auditorium that seats 800 people You can sell 600 tickets at $20 each

OR

You can sell 800 tickets at $15 each

What price did your table group decide on and why?

Price elasticity of demand = (Q2-Q1)/[(Q1+Q2)/2]

(P2-P1)/[(P1+P2)/2]

Insulin Q1 = 12 injections per week Q2 = 14 injections per week P1 = $20 per injection P2 = $10 per injection

Brand of Orange Juice Q1 = 1 quart per week Q2 = 3 quarts per week P1 = $2.50 per quart P2 = $2.25 per quart

Price elasticity of demand = (Q2-Q1)/[(Q1+Q2)/2]

(P2-P1)/[(P1+P2)/2]

Insulin

(14-12)/[(12+14)/2](10-20)/[(20+10)/2]

2/[26/2] =2/13 = .1510/[30/2] = 10/15 = .67

Elasticity = .22

Less than 1 = inelastic

OJ

(3-1)/[(1+3)/2](2.25-2.50)/[(2.50+2.25)/2]

2/[4/2] = 2/2 = 1.25/[4.75/2] =.25/2.375

=.11

Elasticity = 9.1

Greater than 1 = elastic