 Download Presentation Essential Question: What factors affect elasticity of demand?

# Essential Question: What factors affect elasticity of demand? - PowerPoint PPT Presentation

Chapter 4.3 Elasticity of Demand. Essential Question: What factors affect elasticity of demand?. Objectives. Explain what is and how to calculate elasticity of demand. Identify factors that effect elasticity. What is Elasticity of Demand?. I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation ## Essential Question: What factors affect elasticity of demand?

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript Chapter 4.3 Elasticity of Demand

• Essential Question:

What factors affect elasticity of demand? Objectives

Explain what is and how to calculate elasticity of demand.

Identify factors that effect elasticity. What is Elasticity of Demand?
• Elasticity of demand is how much consumers will change their demand in response to price changes (rise or fall)
• If you keep buying a good, regardless of a price change, the demand for that good is inelastic.

(Your demand IS NOT flexible, like an inelastic rubber band)

• If you buy much less of a good after a small price increase, your demand for that good is elastic.

(Your demand IS flexible, like an elastic rubber band) Calculating Elasticity of Demand
• Find the percentage change in the quantity of the good demanded
• Find the percentage change in the price
• Divide %Chg Quantity Demand / %Chg Price
• Calculate elasticity of demand for every change in price in the demand schedule/curve
• The law of demand implies that the result will always be negative.

%∆ Quantity Demand

Elasticity of Demand =

%∆ Price  Measuring Elasticity of Demand
• If the elasticity of demand for a good at a certain price is: Factors that Affect Elasticity of Demand
• Elastic Demand comes from one or more of these factors (p100-101 picture)
• The availability of substitute goods
• A limited budget that does not allow for price changes
• The perception of a good as a luxury item. Factors that Affect Elasticity of Demand

• Availability of Substitutes
• If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it.
• Few substitutes can make demand inelastic
• Many substitute goods can make demand elastic. Factors that Affect Elasticity of Demand

• Relative Importance/Share of the Budget
• how much of your budget do you spend on a good/service?
• Bigger share means more elastic demand
• Necessities v. Luxuries
• Is the good/service a necessity or luxury?
• Necessity = inelastic demand
• Luxury = elastic demand  Key Terms
• elasticity of demand: a measure of how consumers respond to price changes
• inelastic: describes demand that is not very sensitive to price changes
• elastic: describes demand that is very sensitive to a change in price
• unitary elastic: describes demand whose elasticity is exactly equal to 1
• total revenue: the total amount of money a company receives by selling goods or services