Elasticity of DemandHow sensitive is demand to price changes?
Slope of Demand Curves• Demand curves do not all have the same slope
• Slope indicates response of buyers to a change in price
D1
D1
Price ↑ 10% => Qty Demanded ↓ ? (how much?)
Which demand curve is most sensitive to price changes?
D1
Price
Qty
ELASTICITY OF DEMAND
• Elasticity of demand (Ed) measures the sensitivity of quantity demanded in response to a change in price:
Ed = % change Qty D % change Price
Elastic Demand Curves
• Elastic Demand– Demand is sensitive to price changes
– Demand Curves are flat
– Ed > 1
– A % ↑ Price leads to a greater % decline in Qty Demanded
D1
Px
Qty
Ed = % change Qty D % change Price
Example: Elastic Demand Curve
10% rise in Pricecauses a Greaterthan 10 % decline in Qty D
.
Ed = 1.5 Ed = % change Qty D % change Price
Inelastic Demand Curves
• Inelastic Demand– Demand NOT sensitive to price changes
– Curves are STEEP
– Ed < 1
– A % ↑ Price leads to a SMALLER % decline in Qty Demanded
D1
Px
Qty
Ed = % change Qty D % change Price
Example: Inelastic Demand Curve
Quantity
↑% Price changes Leads to a smaller % decline in Qty D
+100%
-10%
Ed = 0.1
Ed = % change Qty D % change Price
Elasticity depends on:
• Number of close substitutes– more substitutes => more elastic demand
• Whether the good is considered a necessity– Necessities tend to be inelastic, luxury goods are elastic
• Proportion of income spent– larger proportion of income more elastic
• Time period– Longer the time period => the more elastic demand is
Price Elastic or Price Inelastic?
Soda
Heart Surgery Table Salt
Gasoline
Price Inelastic
No real substitutes
Price Inelastic
Necessity &No real substitutes,Short time period
Price Elastic
Many substitutes
Price Inelastic
Small proportionof income, no goodsubstitute
Total Revenue & Profit
• Total Revenue = Price X Quantity
• Profit = Total Revenue - Expenses
Elasticity determines the effect on total revenue
Total Revenue => when Prices elastic goods
Total Revenue => when Prices inelastic goods
Elastic Demand
200 300
$200
$150
Raising prices will lower total revenue!
Elasticity Worksheet
D1
Px
Qty
D1
Px
Qty
Elastic Demand Inelastic Demand
Total Revenue = Price * Quantity
GDP