ELASTICITY OF DEMAND
I. Elasticity of Demand: measures the responsiveness of Qd to a change in P
II. Elasticity of Demand = __% change in Qd__
% change in P
III. Types of Elasticity
Elastic Demand: Qd changes by a greater % than P
~ the numerator changes more than the denominator (dividing equation = > 1)
~ example: P of light bulbs increases by 10%, the Qd decreases by 30%
Inelastic Demand: Qd changes by a smaller % than P
~ the numerator changes less than the denominator (dividing equation < 1)
~ example: P of salt increases by 10%, the Qd decreases by 2%
Unit-Elastic Demand: Qd & P change by the same % (dividing equation = 1)
IV. Determinants of Elasticity (factors that determine the elasticity of an item)
1. Number of Substitutes
~ goods w/ many substitutes will have an elastic demand
~ goods w/ few or no substitutes will have an inelastic demand
~ example: heart medicine & bread
2. Luxury v. Necessity
~ luxury items will have elastic demand
~ necessities will have inelastic demand
3. Percentage of Income Spent
~ items consuming more or our income = elastic demand
~ items consuming little of our income = inelastic demand
4. Time
~ over time, quantity demanded becomes more elastic
~ more substitutes become available
~ change in lifestyle
5. Specific Item v. General Market
~ gasoline in general = inelastic demand
~ gas at a specific store = elastic demand
TOTAL REVENUE (TR)
I. Elasticity can affect total revenue; the effects depends on consumer response to changes in price
II. Total Revenue (TR) = P x Q
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Type of Elasticity |
Change in P |
Change in TR |
Movement of P & TR |
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Elastic Inelastic Unit-elastic |
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