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Essential Question: What factors affect elasticity of demand?

Chapter 4.3 Elasticity of Demand. Essential Question: What factors affect elasticity of demand?. Objectives. Explain what is and how to calculate elasticity of demand. Identify factors that effect elasticity. What is Elasticity of Demand?.

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Essential Question: What factors affect elasticity of demand?

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  1. Chapter 4.3 Elasticity of Demand • Essential Question: What factors affect elasticity of demand?

  2. Objectives Explain what is and how to calculate elasticity of demand. Identify factors that effect elasticity.

  3. What is Elasticity of Demand? • Elasticity of demand is how much consumers will change their demand in response to price changes (rise or fall) • If you keep buying a good, regardless of a price change, the demand for that good is inelastic. (Your demand IS NOT flexible, like an inelastic rubber band) • If you buy much less of a good after a small price increase, your demand for that good is elastic. (Your demand IS flexible, like an elastic rubber band)

  4. Calculating Elasticity of Demand • Find the percentage change in the quantity of the good demanded • Find the percentage change in the price • Divide %Chg Quantity Demand / %Chg Price • Calculate elasticity of demand for every change in price in the demand schedule/curve • The law of demand implies that the result will always be negative. %∆ Quantity Demand Elasticity of Demand = %∆ Price

  5. From P. 98

  6. Measuring Elasticity of Demand • If the elasticity of demand for a good at a certain price is:

  7. Factors that Affect Elasticity of Demand • Elastic Demand comes from one or more of these factors (p100-101 picture) • The availability of substitute goods • A limited budget that does not allow for price changes • The perception of a good as a luxury item.

  8. Factors that Affect Elasticity of Demand • Availability of Substitutes • If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it. • Few substitutes can make demand inelastic • Many substitute goods can make demand elastic.

  9. Factors that Affect Elasticity of Demand • Relative Importance/Share of the Budget • how much of your budget do you spend on a good/service? • Bigger share means more elastic demand • Necessities v. Luxuries • Is the good/service a necessity or luxury? • Necessity = inelastic demand • Luxury = elastic demand

  10. Elasticity and Revenue

  11. Key Terms • elasticity of demand: a measure of how consumers respond to price changes • inelastic: describes demand that is not very sensitive to price changes • elastic: describes demand that is very sensitive to a change in price • unitary elastic: describes demand whose elasticity is exactly equal to 1 • total revenue: the total amount of money a company receives by selling goods or services

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