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Elasticity of Demand

Elasticity of Demand. What is Elasticity of Demand?. Elasticity of demand is the degree to which changes in a good’s price affect the quantity demanded by consumers. You have either: Elastic Demand or Inelastic Demand. What is Elastic Demand?.

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Elasticity of Demand

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  1. Elasticity of Demand

  2. What is Elasticity of Demand? • Elasticity of demand is the degree to which changes in a good’s price affect the quantity demanded by consumers. • You have either: • Elastic Demand • or Inelastic Demand

  3. What is Elastic Demand? Elastic Demand is when a small change in a good’s price causes a major, opposite change in the quantity demanded. • A good must have one of the following characteristics: • Product is not a necessity • There are readily available substitutes • The product’s cost represents a large portion of consumer’s income Example: Pizza • Pizza is not a necessity • has many substitutes • third factor is debatable – depends on income. Can you think of any other examples?

  4. What is Inelastic Demand? Inelastic Demand = when a change in a good’s price has little impact on the quantity demanded. • For a good to have inelastic demand it must have the following characteristics: • The Product is a necessity • There are few or no readily available substitutes • The Product’s cost represents a small portion of consumers’ income Example: Gasoline • It is a necessity – at least in our economy • It has few real substitutes. • It is relatively inexpensive, even for people who have little money Can you think of any other examples?

  5. How is the elasticity of demand classified? You can classify elasticity into Specific & General Markets • Lets use a metaphor in photography • Think about a snapshot of a particular place and time. • Imagine the difference between a wide-angle and a close up shot. • A wide-angle shot would be the general market • A close up shot would be a specific market Example: gasoline • General market for gasoline is inelastic- We need it no matter how high the price goes. • Specific market for gasoline (like Chevron vs AM/PM) – is elastic. If Chevron is more expensive than AM/PM we need the gas, but we will likely go to the cheaper of the two if prices are high.

  6. How do you actually measure elasticity? Measuring Elasticity- Producers must determine demand elasticity so they can set prices for products. • Simplest way is total revenue test.

  7. Total revenue and elasticity demand • Drop in total revenue from a price increase indicates elastic demand. • Increase in total revenue from a price increase indicates inelastic demand.

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