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Understanding Demand Elasticity in Economics

Learn about elasticity of demand, differentiate between elastic and inelastic demand, and explore factors influencing demand elasticity. Discover the concept of total expenditures and its significance in determining profitability.

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Understanding Demand Elasticity in Economics

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  1. Ch. 4, Section 3 Elasticity of Demand

  2. Elastic demand: when a given change in P causes a relatively larger change in QD % change in QD was relatively larger than % change in P Figure 4.5 (pg. 103) Many substitutes; non-necessities Ex: food items, movie tickets, restaurants Inelastic demand: a given change in P cause a relatively smaller change ( and sometimes no change) in the QD Figure 4.5 Very little of no subs.; necessities Demand Elasticity: the extent to which a change in price causes a change in the QD

  3. Elasticity (con’t) • Unit Elastic: a given change in P causes a proportional change in QD • The % change in Q roughly equals the % change in P • Figure 4.5, Panel C

  4. Total Expenditures Test • Total Expenditures are found by multiplying the P of a product by the QD for any point along the D curve • P x QD= total expenditures • 3 Results • Why is this important? • profits

  5. Determinants of Elasticity • Can the purchase be delayed? Inelastic: No- example: insulin for a diabetic, cigarettes for a smoker Elastic: Yes- sub. it w/ something else • Are adequate substitutes available? Inelastic: No Elastic: yes • Does the purchase use a large portion of income: If yes, the product tends to be elastic. If no, the product tends to be inelastic • Figure 4.6

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