Elasticity of Demand

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Elasticity of Demand
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Slope of Demand Curves

• All demand curves do not have the same slope
• Slope indicates responsiveness of buyers to a
  change in price

Which demand curve is most sensitive to price
changes?
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PRICE ELASTICITY OF DEMAND

• The change in quantity demanded in response to a
  change in price of a good

Ed ? Qty D ? P
If Price ? 10 Qty Demanded ? 15 then Ed
____
Ed gt 1 is sensitive to price changes Ed lt 1 is
not sensitive to price changes
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3 Types of Demand

• Elastic Demand
• Quantity demanded responds strongly to price
  changes
• Ed is gt than 1 (Ed ? Qty D/ ? P)
• Inelastic Demand
• Quantity demanded does not respond strongly to
  price changes
• Edlt than 1
• Unit Elastic Demand
• Quantity demanded changes the same percentage as
  price changes
• Ed 1

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Determinants of Elasticity of Demand

• Availability of Close Substitutes
• Necessities vs. Luxuries
• Proportion of Income
• Time Horizon

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Demand is more elastic when

• If there are many close substitutes
• if the good is a luxury
• If it represents a larger of budget
• If the purchase can wait for a longer time period

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Demand is more inelastic when

• If there are no close substitutes
• If it is a necessity
• If it represents a smaller of budget
• If the purchase is needed in a shorter time
  period

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Estimating the Elasticity of Demand3 Key
Questions1. Subs? 2. Necessity? 3. Expensive?
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Price Elastic or Price Inelastic?
Price Inelastic Need it now 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