Elasticity of Demand

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

Inelastic- Your demand for a good that you will keep buying despite a price increase.Patented prescription drugs,

Elastic- Your demand for a good that you will buy much less of after a small price increaseLobster,

Elasticity

Price rangeIf the price of a magazine increases from 20 cents

to 30 cents, it will be inelastic. If the price increases from $4 to $6, the demand will be much more elastic.

Elasticity= % change in demand of good/ % change in price of good.

Values of ElasticityIf the elasticity of demand is less than 1,

INELASTICIf the elasticity of demand is greater than 1,

ELASTICIf the elasticity of demand is exactly 1, UNITARY

ELASTIC

Calculating Elasticity

Availability of SubstitutesFewer substitutes—still may buy, even with a

price increase.Concert tickets, Life saving medicineLack of substitutes can make demand inelastic,

wide choice makes demand elastic.

Relative ImportanceIf you spend a large amount of your income on

a good, a price increase will force you to make tough choices.Must reduce spending on that good.If you spend half your income on clothes, and the

price of clothes goes up, you will have to reduce your consumption of clothes.

If the price of shoelaces goes up, you wont really notice or spend less on shoelaces.

Factors Affecting Elasticity

Necessities Versus LuxuriesWhether a person considers a good to be a

necessity or a luxury impacts the good’s elasticity of demand for the person. A necessity is a good that people will buy, even if

the price goes up. Parents consider milk to be inelastic.

Change over timePrice changes over time. People cannot

respond right away. Demand is inelastic in the short term.Gasoline is more inelastic in the short run, and

more elastic in the long run.

Factors Affecting Elasticity

Total Revenue- the total amount of money a firm receives by selling goods or services. Pizza: 125 slices per day at $2 a slice….

Total revenue and elastic demand: Price goes down, Total revenue risesPrice goes up, Total revenue falls

Total revenue and inelastic demand:As the price is lowered, Total revenue fallsAs the price is raised, Total revenue rises

Elasticity and Revenue