Objectives
LESSON 4.2
Elasticity of Demand
 Compute the elasticity of demand, and
explain its relevance.
 Discuss the factors that influence
elasticity of demand.
1
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
Key Terms
LESSON 4.2
Elasticity of Demand
 elasticity of demand
 total revenue
2
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
Computing the
Elasticity of Demand
Elasticity of demand measures the
percentage change in quantity demanded
divided by percentage change in price.
Elasticity
of demand
3
=
Percentage change in
quantity demanded
Percentage
change in price
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
Computing the
Elasticity of Demand
Elasticity values
Elasticity and total revenue
4
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
The Demand for Pizza
Price per pizza
$15
12
9
6
3
D
0
8 14 20 26 32
Millions of pizzas per week
5
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
Determinants of
Demand Elasticity
Availability of substitutes
Share of consumer’s budget spent
on the good
A matter of time
Some elasticity estimates
6
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
Demand Becomes
More Elastic Over Time
$1.25
1.00
Price per gallon
Dy
Dm
Dw
0
7
50
75
95100 Millions of gallons per day
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN
Selected
Elasticities of Demand
Product
8
Short Run
Long Run
Electricity (residential)
0.1
1.9
Air travel
0.1
2.4
Medical care and hospitalization
0.3
0.9
Gasoline
0.4
1.5
Movies
0.9
3.7
Natural gas (residential)
1.4
2.1
CONTEMPORARY ECONOMICS: LESSON 4.2
© SOUTH-WESTERN