ELASTICITY OF DEMAND
I. ELASTICITY
a. Elasticity = a measure
of responsiveness; shows
how one variable
responds to change in
another variable.
i. Ex: how quantity
demanded responds to
price
II. DEMAND ELASTICITY
a. Consumers react to price changes by changing
quantity they demand
i. Demand Elasticity = measure showing how a change in
quantity demanded responds to a change in price.
b. Demand is elastic = a change in price causes a
relatively LARGE change in quantity demanded.
i. Ex: Fresh Veggies prices:
Lower in summer = consumers increase amount they
purchase.
Higher in winter = consumers buy canned/frozen instead
c. Demand can also be inelastic = a
change in price causes a relatively SMALL
change in quantity demanded.
i. Ex: Table salt - price change doesn’t
bring much change in quantity
purchased.
Even if price cut in half, quantity
demanded wouldn’t increase by
much
d. Unit elastic = a change in price causes
a proportional change in the quantity
demanded.
i. The % change in quantity equals the %
change in price
III. TOTAL EXPENDITURES TEST
a. Total Expenditures Test = shows amount that consumers spend
on a product at a particular price
b. Multiply price of product by quantity demanded for any point
along demand curve
(Price X Quantity Demanded) = TET
i. Observing change in total expenditures when price changes
is a test for elasticity
ii. A LARGE change in quantity demanded = Elastic
Small change in quantity demanded = Inelastic
IV. DETERMINANTS OF
DEMAND ELASTICITY
a. Three questions help determine a product’s demand
elasticity:
1. Can the purchase be delayed?
Can delay purchase = demand is likely elastic
Can’t delay purchase = product is likely inelastic
2. Are adequate substitutes available?
The fewer the substitutes, the more inelastic the product
3. Does the purchase use a large portion of income?
Requires large amount of your income = elastic
Amount required is small = demand tends to be inelastic