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Demand Elasticity: Impacts on Total Expenditure

Learn about demand elasticity and total expenditure, how price changes affect quantity demanded, and the determinants of demand elasticity. See examples and calculations to grasp the concept effectively.

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Demand Elasticity: Impacts on Total Expenditure

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  1. Chapter 4.3 notes Demand Elasticity

  2. Demand Elasticity • HOW MUCH a change in P causes a change in Qd • Elastic – when a change in P causes a relatively larger change in Qd. Ex: green beans, corn, tomatoes, etc.

  3. cont’d • Inelastic – a change in P causes a relatively smaller change in the quantity demanded. Ex: table salt, gas • Unit Elastic – a given change in price causes a proportional change in quantity demanded.

  4. Calculating Demand Elasticity Demand Elasticity = %ΔQd %ΔP If the numerator is > denominator = elastic If the denominator is > numerator = inelastic

  5. Total Expenditures Test • TE= P x Qd • If demand curve is elastic – when P down, TE up. (inverse) • If the demand curve is inelastic – P down, TE down and vice versa • If the demand curve is unit elastic – P down OR up and NO change in TE

  6. $4 P × Q = $400 P (TE) Demand 100 Q Total Expenditure Price When the price is $4, consumers will demand 100 units, and spend $400 on this good. Quantity 0

  7. $3 TE = $240 $1 Demand Demand TE = $100 100 80 How TE Changes When Price Changes: Inelastic Demand Price Price An Increase in price from $1 to $3 … … leads to an Increase in TE from $100 to $240 Quantity Quantity 0 0

  8. $5 $4 Demand Demand TE = $200 TE = $100 50 20 How TE Changes When Price Changes: Elastic Demand Price Price An Increase in price from $4 to $5 … … leads to an decrease in TE from $200 to $100 Quantity Quantity 0 0 Note that with each price increase, the Law of Demand still holds – an increase in price leads to a decrease in the quantity demanded. It is the change in TR that varies!

  9. Determinants of D Elasticity • Necessities vs. Luxuries – Necessities usually inelastic • Substitutes goods/services - If no sub, usually inelastic • Portion of income – if uses a large portion of income, usually elastic

  10. Rank the following items from most elastic to least elastic • Honda Accord • Beef • European vacation • Salt • Dijon mustard • steak

  11. Results…? • European Vacation • Honda Accord • Dijon mustard • Steak • Beef • salt

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