Chapter 4
Elasticity of Demand
Lesson 3
Economics
Three Cases of Demand Elasticity
• Demand elasticity
• Extent to which change in price causes change in the quantity
demanded.
•
Demand is elastic
• When a change in price causes a relatively larger change in quantity demanded.
•
Demand is inelastic
• When a change in price causes a relatively smaller change in quantity demanded.
•
Demand is unit elastic
• When a change in price causes a proportional change in quantity demanded.
•
To measure elasticity of demand
• Compare the percentage change in quantity demanded to the percentage change
in price.
The Total Expenditures Test
• Total expenditures test
• Compares the direction of a price change to the direction of change in
total revenue or total expenditures.
•
With elastic demand
• A change in price moves in the opposite direction from the change in revenue.
•
With unit elastic demand
• There is no change in revenue, regardless of the price change.
•
With inelastic demand
• The price and change in revenue move in the same direction.
•
Businesses often experiment with different prices for a new product to determine its
demand elasticity
• Allows the businesses to set a price that maximizes total revenues.
Determinants of Demand Elasticity
•
Demand is usually inelastic if consumers cannot postpone purchase of a product.
•
When acceptable substitutes are available for a product
• Demand becomes more elastic.
•
Demand for purchases that require a large portion of income is generally more elastic
than the demand for purchases that require a smaller amount of income.