2. Warm-up
Think about the last thing that you bought, would you
still buy it if it were 30 NT more? 300 NT more? 3000
NT more?
How much would the price have to change for you not
to buy it?
3. Elasticity of Demand
A measure of how responsive consumers are to price
changes
The law of demand tells us what will happen; elasticity
of demand will tell us by how much!
Tells us how sensitive customers are to price change
4. Elastic versus Inelastic
Demand is Elastic if quantity demanded changes
significantly (a lot) as price changes
Demand is Inelastic if quantity demanded changes
little as price changes
The more inelastic a product the steeper the demand
curve.
If quantity demanded is a rubber band, then elastic
demand will cause it to stretch a lot and inelastic
demand hardly at all.
5. Unit Elastic
Demand is unit elastic when the percentage change in
price and quantity demanded are the same.
A 10% increase in price would cause a 10% decrease in
quantity demanded
No product is truly unit elastic, but this is the middle
point between a product being elastic or inelastic.
6. Warm-up
How does an inelastic demand curve look different
from an elastic demand curve?
Draw the difference!
7. Factors that determine Elasticity
Substitute goods or services
If there is no substitute then it tends to be inelastic
Proportion of income
The lower the percentage of income it affects, the more
likely it will be elastic.
Ex: if you already spend a lot of money on something, it
may be harder to spend just a little more on it, thus
being inelastic for you. (This changes as income
changes)
8. Factors that affect Elasticity cont.
Necessities versus Luxuries
A necessity is something you must have: food, water,
etc…
Even if prices rise, consumers will pay what they can afford
A luxury is something you desire, but is not essential to
life: a television, video games, etc…
Demand for necessities tends to be inelastic while
demand for luxuries tends to be elastic
9. Calculating Elasticity of Demand
((Original Quantity – New Quantity)/ (Original
Quantity) )x 100 = Percentage change in quantity
demanded
((Original Price – New Price)/(Original Price)x100 =
Percentage change in price
(Percentage change in quantity demanded)/
(Percentage change in price) = Elasticity
If elasticity is less than 1 then demand is inelastic, if it is
greater than 1 then demand is elastic.
10. Total Revenue
Total revenue is a company’s income from selling its
products
Price X Quantity = Total Revenue
Total Revenue test is a method of measuring elasticity
by comparing total revenues
If total revenue increases after the price decreases,
then demand is considered elastic.
