2.3 Price elasticity of Demand

The Law of Demand says...

Consumers will buy more when prices go down and less when prices go up

Elasticity is about determining how much more or how much less

Price Elasticity of Demand (PED)

Measures how sensitive quantity demanded is to a change in price 

Knowing how consumers will respond to a change in price is extremely useful to firms

Why does elasticity matter?

• It helps them decide what to charge and when, if ever, to have sales

• It helps them determine how many substitutes are in the market

• It is also used by the government to decide when and how much to tax 
  

Inelastic Demand

INelastic Demand= Quantity is INsensitive to a change in price. 

• If price increases, quantity demanded will fall a little

• If price decreases, quantity demanded increases a little. 

In other words, people will continue to buy it. 

An INELASTIC demand curve is steep! (looks like an “I”)

Examples:

• Gasoline

• Milk

• Diapers

• Chewing Gum

• Medical Care

• Toilet paper
  

General Characteristics of INelastic Goods:

1. Few Substitutes

2. Necessities

3. Small portion of income

4. Required now, rather than later 

5. Elasticity coefficient less than 1

Elastic Demand

Elastic Demand = Quantity is sensitive to a change in price. 

• If price increases, quantity demanded will fall a lot

• If price decreases, quantity demanded increases a lot. 

In other words, the amount people buy is sensitive to price. 

An ELASTIC demand curve is flat!

Examples:

• Soda

• Boats

• Beef

• Real Estate

• Pizza

• Gold

  General Characteristics of Elastic Goods:

  1.  Many Substitutes

  2.  Luxuries

  3.  Large portion of income

  4.  Plenty of time to decide

  5.  Elasticity coefficient greater than 1
     

Calculating Percent Change 

%change = new # -old# divided by old # X100

Calculate Percent Change. Show your work. 

1. Price increased from $40 to $50.

= +25%

2. Quantity fell to 12 from 18

-33%

3. Price decreased from $600 to $540

-10%

4. Quantity increased from 300 to 360

5. Price increased from $80 to $140.

When calculating percent change for elasticity don’t multiple by 100. Leave the numbers as a decimal. 

Elastic or Inelastic?

What about the demand for insulin for diabetics?

Elastic -1.27

INelastic -.20

Elastic -1.60

INelastic -.31

INelastic -.13

Elastic -2.6 

Beef- 

Gasoline- 

Real Estate- 

Medical Care-  

Electricity- 

Gold

What if % change in quantity demanded equals % change in price?

Perfectly INELASTIC

(Coefficient = 0)

Unit Elastic (Coefficient =1)