4.

3 Elasticity of Demand
Objectives
After studying this section, you will be able to: ! Explain why elasticity is a measure of responsiveness. ! Analyze the elasticity of demand for a product. ! Understand the factors that determine demand elasticity.

1 Section 3-2

Introduction
! Cause-and-effect relationships are important in the study of economics. If one thing happens, how will it affect something else?

2 Section 3-4

Introduction
! Elasticity - measure of responsiveness that tells us how quantity (a dependent variable) responds to price (a change in an another variable).

! Elasticity can be applied to income, the quantity of a product supplied by a firm, or to demand.
3 Section 3-4

Demand Elasticity

! Demand elasticity measures how sensitive consumers are to price changes. es Test for Demand Elasticity ! Demand is elastic when a change in price causes a large change in demand. Figure 4.5 Demand is inelastic when a change in price causes a small change in demand.
4

The Total Expenditures Test for De

Section 3-5

Figure 4.5 The Total Expenditures Test for Demand Elasticity

Demand Elasticity
Demand is unit elastic when a change in price causes a proportional change in demand.

5 Section 3-5

Discussion Question
What are examples of items for which an increase in price would cause you or your family to reconsider buying them?

6 Section 3-Assessment 1

The Total Expenditures Test

! Price x quantity demanded = expenditures. ! Changes in expenditures depend on the elasticity of a demand curve.

7 Section 3-9

The Total Expenditures Test

! Understanding the relationship between elasticity and profits can help producers effectively price their products.
8 Section 3-9

A.! B.! C.! D.! E.!

The Elasticity of demand is equal to 5! Demand is elastic! Demand is inelastic! Demand is unit elastic! The elasticity of demand is equal to 2!

<1 Inelastic =1 Unit Elastic Reflects % change in demand >1 Elastic

Reflects % change in price

Discussion Question
What are examples of items for which a drop in price would not encourage you to buy more of an item?

10 Section 3-Assessment 1

Determinants of Demand Elasticity

! Demand is elastic if the answer to the following questions are yes.
! Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes. ! Are adequate substitutes available? Price changes can cause consumers to substitute on product for a similar product. ! Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumers income.

11 Section 3-14

Determinants of Demand Elasticity

(cont.)
Figure 4.6 Estimating the Elasticity of Demand

Section 3-15

Discussion Question
What are some things you buy for which price is not the issue?

13 Section 3-Assessment 1