Microeconomics - Chapter 3: Elasticity of Demand

ELASTICITY OF DEMAND

refers to the shift in demand for an item or service when a change occurs in one of the variables that buyers consider as part of their purchase decisions.

FOUR TYPES OF ELASTICITY

PRICE ELASTICITY OF DEMAND (PED)

CROSS ELASTICITY OF DEMAND (XED)

INCOME ELASTICITY OF DEMAND (YED)

ADVERTISING ELASTICITY OF DEMAND (AED)

PERFECTLY ELASTIC DEMAND

Any price change leads to no demand.

PERFECTLY INELASTIC DEMAND

Demand remains constant regardless of price changes.

UNITARY ELASTIC DEMAND

A price change results in a proportional change in demand.

ELASTIC DEMAND

A small price change leads to a large change in demand. Occurs when a small change in price results in a large change in the quantity demanded.

INELASTIC DEMAND

A price change has little effect on demand. Occurs when changes in price result in only a small change in the quantity demanded.

UNITARY ELASTICITY

occurs when a change in price leads to a proportional change in the quantity demanded.

DETERMINANTS OF ELASTICITY OF DEMAND

AVAILABILITY OF SUBSTITUTES

URGENCY OF PURCHASE

DURATION OF PRICE CHANGE

PERCENTAGE OF INCOME

NECESSITY

BRAND LOYALTY

BUYER

AVAILABILITY OF SUBSTITUTES

More substitutes make demand elastic.

URGENCY OF PURCHASE

When customers are not in a rush to make a purchase, they can put it off if prices are increasing.

DURATION OF PRICE CHANGE

Over time, consumers adjust to price changes, making demand more elastic.

PERCENTAGE OF INCOME

Purchases that represent a higher percentage of a household budget tend to be more elastic than those that are smaller.

NECESSITY

Customers will be rigid when purchasing products considered indispensable for survival or quality of life.

BRAND LOYALTY

When customers have a high level of brand loyalty, they are less likely to swap brands, resulting in a higher level of inelasticity of demand.

BUYER

The "other people's money" concept shows that the same product may be susceptible to different levels of price elasticity depending on who pays for the goods.