ELASTICITY OF DEMAND Elasticity of Demand The degree

ELASTICITY OF DEMAND

Elasticity of Demand • The degree to which changes in price cause changes in demand or • If we change the price, will demand change a lot or a little?

Elastic Demand • If Demand for a good is very sensitive to changes in price, the demand is ELASTIC Or • If prices changes a little bit, demand will change a lot!

Example of Elastic Demand • Price of pizza goes up even a little bit, demand goes down a lot.

Inelastic Demand • Demand for a good that consumers will continue to buy despite a price increase is INELASTIC OR • Even if price changes a lot, demand changes very little

Example of Inelastic Demand • The price of soap goes up a lot, the demand stays almost the same.

Factors Affecting Elasticity • Several different factors can affect the elasticity of demand for a certain good. 1. Availability of Substitutes If there are few substitutes for a good, the demand will not likely decrease as price increases (inelastic), the opposite (lots of substitutes) is also usually true (elastic) Ex. Gasoline has no substitutes- inelastic Mc. Donalds has many (Burger King, etc)elastic

Factors Affecting Elasticity (Cont. ) 2. Relative Importance Another factor determining elasticity of demand is how much of your budget you spend on the good. Ex. Mortgage payment must be paid (inelastic) Entertainment (movies, etc. ) are elastic

Factors Affecting Elasticity (Cont. ) 3. Necessities vs. Luxuries Whether a person considers a good to be a necessity or luxury has a great impact on the good’s elasticity of demand for that person. Ex. Food (inelastic) Jewelry (elastic)

Factors Affecting Elasticity (Cont. ) 4. Change over Time Demand sometimes becomes more elastic over time because people can eventually find substitutes. Ex. Blockbuster used to be the only place to rent videos (inelastic) Netflix, Video on Demand, Pay Per View, are substitutes for Blockbuster (elastic)

Change in Demand • A demand curve is only accurate as long as there are no changes other than price that could affect a consumer’s decision • When factors other than price (non-price factors) affect the demand curve, the entire curve shifts to the left or to the right

Non-Price Factors that effect Demand • These factors will cause the demand curve to shift to the left (less quantity demanded) or to the right (more quantity demanded)

1. Change in Income • As people earn more money, the demand for luxury goods will increase • As people earn less money, the demand for luxury goods will decrease • Ex. If I win the lottery, I’ll buy a Jaguar If I get laid off, I’ll take the bus

2. Substitution Effect • If there is a substitute product, demand for an item may be influenced by the price of the substitute • Ex. If the price of butter goes up, people will substitute margarine.

3. Complimentary Products • The demand for an item will increase or decrease if the price of a complimentary product (something that goes with it) increases or decreases • Ex. If the price of hot dogs goes up, the demand for hot dogs goes down, thereby decreasing the demand for hot dog buns

4. Change in Attitudes • As people’s attitudes about products change, so does the demand • Ex. Fashion, music, food