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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.

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

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.
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Demand Elasticity

Demand elasticity measures how sensitive consumers are to price changes. 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.
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The Total Expenditures Test for

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.

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

The Total Expenditures Test

Price times quantity demanded = expenditures. Changes in expenditures depend on the Figure 4.5 elasticity of a demand curve. If change in The Total Expenditures Test for Demand Elasticity price and expenditures
1. move in opposite directions = demand is elastic 2. move in the same direction = demand is inelastic 3. no change in expenditures = demand is unit elastic.

The Total Expenditures Test

Understanding the relationship between elasticity and profits can help producers effectively price their products.
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Discussion Question
What are examples of items for which a drop in price would not encourage you to buy more of an item?

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.

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Determinants of Demand Elasticity

(cont.)
Figure 4.6 Estimating the Elasticity of Demand

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

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