ECONOMICS CHAPTER 3, SECTION 3

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ECONOMICSCHAPTER 3, SECTION 3

• Elasticity of Demand

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I. Elasticity of Demand

• A. Elasticity of demand measures the degree to
  which changes in price change the quantity
  demanded.
• B. There are three types of elasticity of demand
• 1. Elastic Demand
• 2. Inelastic Demand
• 3. Unit Elastic Demand

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II. Elastic and Inelastic Demand

• ELASTIC DEMAND
• Small change in P causes large change in QD

• INELASTIC DEMAND
• Change in P causes small change in QD

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II. Elastic and Inelastic Demand

• Unit ElasticNo change

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III. Determinants of Elasticity

• ELASTIC DEMAND
• Luxury good/not a necessity
• Has readily available substitutes
• Takes a large portion of income

• INELASTIC DEMAND
• Necessity
• Few substitutes available
• Takes a small portion of income

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IV. Examples

• ELASTIC DEMAND
• Plasma television

• INELASTIC DEMAND
• Salt

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V. General vs. Specific Market

• Market can be a factor in determining elasticity
• Ex. Gasoline

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VI. How elasticity is measured

• A. Total Revenue-The total income a business
  receives from selling its products.
• P x QD TR

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VI. How elasticity is measured

• B. Total revenue determines the elasticity of
  demand for a good or service.

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VI. How elasticity is measured

• Elastic Demand
• P, TR
• P, TR

• Inelastic Demand
• P, TR
• P, TR

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VI. How elasticity is measured

• C. Maximizing TRthe price that should be charged
  to achieve the highest revenue.
• D. Why would a business owner conduct a TR test?