Chapter 4 3 notes Demand Elasticity Demand Elasticity

Chapter 4. 3 notes Demand Elasticity

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.

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.

Calculating Demand Elasticity = %ΔQd %Δ P If the numerator is > denominator = elastic If the denominator is > numerator = inelastic

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

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

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

How TE Changes When Price Changes: Elastic Demand Price An Increase in price from $4 to $5 … … leads to an decrease in TE from $200 to $100 $5 $4 Demand TE = $200 0 TE = $100 50 Quantity 0 20 Quantity 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!

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

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

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