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Elasticity of Demand

Elasticity of Demand. How sensitive is demand to price changes ?. Price. D 1. D 1. Qty. D 1. Slope of Demand Curves. Demand curves do not all have the same slope Slope indicates response of buyers to a change in price. Price ↑ 10% => Qty Demanded ↓ ? (how much?).

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Elasticity of Demand

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  1. Elasticity of Demand How sensitive is demand to price changes?

  2. Price D1 D1 Qty D1 Slope of Demand Curves • Demand curves do not all have the same slope • Slope indicates response of buyers to a change in price Price ↑ 10% => Qty Demanded ↓?(how much?) Which demand curve is most sensitive to price changes?

  3. Px D1 Qty Elastic Demand Curves • Elastic Demand • Demand is sensitive to price changes • Demand Curves are flat • A % ↑ Price leads to a greater % decline in Qty Demanded

  4. 10% rise in Price causes a Greater than 10 % decline in Qty D Elastic Demand Curve .

  5. Px D1 Qty Inelastic Demand Curves • Inelastic Demand • Demand NOT sensitive to price changes • Curves are STEEP • A % ↑ Price leads to a SMALLER % decline in Qty Demanded

  6. ↑% Price changes Leads to a smaller % decline in Qty D InelasticDemand Curve Quantity

  7. Elasticity depends on: • Number of close substitutes • more substitutes => more elastic demand • Whether the good is considered a necessity • Necessities tend to be inelastic, luxury goods are elastic • Proportion of income spent • larger proportion of income more elastic • Time period • Longer the time period => the more elastic demand is

  8. Gasoline Soda Heart Surgery Table Salt Price Elastic orPrice Inelastic? Price Inelastic No real substitutes Price Elastic Many substitutes Price Inelastic Necessity & No real substitutes, Short time period Price Inelastic Small proportion of income, no good substitute

  9. Total Revenue=> Prices elastic goods Total Revenue=> Prices inelastic goods Total Revenue & Profit • Total Revenue = Price X Quantity • Profit = Total Revenue - Expenses Elasticity determines the effect on total revenue

  10. Total Revenue & Inelastic Demand Price increases from $6 to $10 Total Revenueincreases Area B = $6 * 20 =$120 Area A = $10 * 18 = $180(TR ↑ $60 ) . $10 $6 . D1 18 20

  11. Elasticity Worksheet Px Px D1 D1 Qty Qty

  12. What you need to know! • More elastic demand curves are flat • Elastic means Qty D is sensitive to Px Changes • Total Revenue=> Prices elastic goods • Total Revenue=> Prices inelastic goods

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