Elasticity
Responsiveness/Sensitivity to Price Changes
Explains what will happen to Total Revenue
when price changes Qd
Explains the strength of consumer response
What is an
Inferior Good?
Something that
people will buy less
of as their incomes
increase
I bought Mac and Cheese in
college, but refuse to buy it now!
What’s the difference in my
income?
What is a
Normal Good?
Something that people
will buy more of as
their incomes increase
I bought bologna in college, but
now I buy steak! What’s the
difference in my income?
Purpose of Measuring
Elasticity
• Law of Demand states as price goes up,
quantity demanded goes down
• Elasticity measures how much QD is
effected by price
• Price elasticity of demand: ratio of
percent change in QD to the % change in
the price as we move along the curve
Elasticity of Goods
• Necessities
• Fairly insensitive to price change
• People will still buy b/c they need them
• Luxuries
• Very sensitive to price change
• Opportunity cost too high
• In general, the more sensitive, the more
elastic the good
Price Elasticity of
Demand
Ed
Ed
=
=
% change in Qd
% change in P
%
%
in Qd
in P
Classifying Ed
• Ed = 1 Unit-elasticity
• Ed > 1 Elastic demand
• Ed < 1 Inelastic demand
Extreme elasticities
• Ed = 0 Perfectly inelastic (vertical
demand curve)
• Ed = ∞ Perfectly elastic (horizontal
demand curve) (when any price increase
causes Qd=0, it’s perfectly elastic)