Price Elasticity of Demand

1. Price Elasticity of Demand

2. What do you think the relationship is between the price of these goods and services and consumers’ behavior? • Prescription eyewear • Car battery • Dental care • Pain Medication • Gasoline • Long-distance phone calls

3. Elasticity • Refers to price responsiveness • The measure of the price elasticity of demand is how much consumers respond to a given change in price.

4. Elastic Demand • A rise or fall in the price of a product GREATLY affects the amount which people are willing to buy. • The good and/or service is not a major necessity. • There are several substitutes for the specific good/service. • Example of an Elastic Good • Meals at a restaurant • $15.99 Chicken Alfredo at Olive Garden • Substitute for a cheaper meal • Cook at home • Mathematically, elastic goods and services have a price elasticity of demand, greater than 1.

5. Inelastic Demand • Demand is not affected by changes in price. • There is not enough flexibility in the demand for the good and/or service. • The good/service is a MAJOR necessity. • There are no satisfactory substitutes for the specific good/service. • Ex: Gasoline for automobiles. • Regardless of the price, people still demand the same amount of gasoline every week. • Mathematically, inelastic goods and services have a price elasticity of demand that is less than 1.

6. What determines price elasticity of demand? • 1. Existence and similarity of substitutes • More substitutes, more responsive consumers will be to a change in price. • Ex: Diet Coke/Diet Pepsi • 2. Percentage of a person’s total budget devoted to the purchases of that good • If you do not spend much of your total budget on a particular good, you will probably not often notice increases in the price of that good. • 3. Time allowed for the consumer to adjust to the price change. • Takes a longer time to adjust to a new price • Longer time needed…greater price elasticity of demand