Econ_100_Ch4

# Econ_100_Ch4 - ECON 100: Introduction to Microeconomic...

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Slide 1 of 48 ECON 100: Introduction to Microeconomic Theory Lecture 6 Yilan Xu

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Slide 2 of 48 Elasticity of Demand The law of demand indicates an inverse relationship between price and quantity demanded. But how much does quantity demanded change when price changes? The Elasticity of Demand measures how sensitive the quantity demanded is to a change in price. A demand curve is said to be elastic when an increase (decrease) in price reduces (increases) the quantity demanded a lot. When the same increase (decrease) in price reduces (increases) quantity demanded just a little, then the demand curve is said to be inelastic .
Slide 3 of 48 Elasticity of Demand … Causes a Small Decrease in Quantity Demanded if Demand is Inelastic \$50 The Same Price Increase 75 Elastic Demand Inelastic Demand \$40 80 Price Quantity Elasticity of Demand Captures the Sensitivity of Quantity Demanded to Changes in Price … Causes a Big Decrease in Quantity Demanded if Demand is Elastic 20

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Slide 4 of 48 Determinants of Elasticity of Demand Why is it that one good may have elastic demand while another good may have inelastic demand? 1. Availability of Substitutes 2. Time Horizon 3. Necessities vs. Luxuries 4. Purchase Size
Slide 5 of 48 Determinants of Elasticity of Demand 1. The availability of substitutes strongly influences the sensitivity of quantity demanded to changes in price. § For goods with fewer substitutes, consumers are unable to adjust quantity demanded significantly in response to a price increase making demand inelastic. § For goods with many substitutes, consumers can easily reduce quantity demanded as price rises by switching to those other products making demand elastic.

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Slide 6 of 48 Determinants of Elasticity of Demand 2. The time horizon influences the elasticity of demand for a good. § Immediately following a price increase, consumers may not be able to alter their consumption patterns, making demand inelastic. § Over time , however, consumers can adjust their behavior by finding substitutes making demand elastic.
Slide 7 of 48 Determinants of Elasticity of Demand 3. The nature of the good to the consumer can also affect the elasticity of demand . § For goods considered as necessities , consumers are more reluctant to reduce quantity demanded when the price rises making demand inelastic. § When goods are considered luxuries , consumers will cut back on their purchases when the price rises, making demand elastic.

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Slide 8 of 48 Determinants of Elasticity of Demand 4. The size of the purchase relative to the consumer’s budget will influence the elasticity of demand. § Consumers are less concerned about price changes when purchases of a good represent a small portion of their incomes making demand inelastic . § Consumers become much
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## Econ_100_Ch4 - ECON 100: Introduction to Microeconomic...

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