Elasticity of Demand

1. Elasticity of Demand Chapter 4 Section 3

2. Demand Elasticity • Elasticity= the cause and effect relationship in economics. • Demand Elasticity= measure of how much a change in price causes a change in the quantity demanded. • Tells how sensitive consumers are to changes.

3. Elastic Demand • When a change in price causes a relatively larger change in quantity demanded, demand is considered to be Elastic. • Typical for products like green beans, corn, tomatoes or other fresh garden vegetables.

4. Inelastic Demand • A given change in price causes a relatively smaller change in quantity demanded. • Typical for products like table salt.

5. Unit Elastic Demand • Change in price is roughly the same as the change in quantity demanded.

6. Total Expenditures Test • The impact price change has on total expenditures helps us to estimate elasticity. • Total expenditures= the amount that consumers spend on a product at a particular price. • TE= price X quantity demanded • For Elastic demand, change in price and TE are inverse. • For Inelastic demand, change in price and TE are directly related. (when one goes up the other goes up)

7. Elasticity and Profits • Companies that sell products that have an elastic demand will lose money from raising prices instead of making more money. • Read the example cover story on page 101.