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**Unformatted text preview: **asticity of demand
The relationship
between the percentage
change in quantity
demanded and the percentage change in price.
elastic demand
The type of demand that
exists when the percentage change in quantity
demanded is greater
than the percentage
change in price. 102 Chapter 4 Demand Suppose Jimmy loves chewing gum, so
much so that he buys as many as four or five
packs a week. One day he notices that the
price of his favorite gum has gone up a quarter. Jimmy will probably now buy less chewing gum. But how much less?
This question about Jimmy’s gum buying
is the kind of question that you will learn
how to answer as you study our next economic concept, elasticity of demand.
Elasticity of demand deals with the relationship between price and quantity demanded.
It is a way of measuring the impact that a
price change has on the number of units of a
good people buy. In some cases a small price
change causes a major change in the number
of units of a good people buy. In other cases,
a small price change causes little change in
how many units of a good people buy. Elastic Demand
Economists have created a way to measure these relationships between price and quantity demanded. They compare the percentage change in quantity demanded of a
good to the percentage change in the price of
that good. In mathematical terms, here is
what elasticity of demand looks like:
Elasticity of
demand Percentage change in
quantity demanded
Percentage change in price In the equation, the numerator is percentage change in quantity demanded, and the
denominator is percentage change in price.
Elastic demand exists when the quantity
demanded (the numerator) changes by a
greater percentage than price (the denominator). For example, suppose the quantity
demanded of lightbulbs falls by 15 percent
as the price of lightbulbs increases by 10
percent. An economist would say that
because the numerator (15%) is greater than
the denominator (10%), the demand for
lightbulbs is elastic. Another way that an
economist might say it is that elasticity of
demand is greater than 1, because if you
divide 15 percent by 10 percent, you get 1.5,
which is greater than 1. 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 103 Inelastic Demand
Inelastic demand exists when the quantity demanded changes by a smaller percentage than price—that is, when the numerator
changes by less than the denominator.
Suppose the quantity demanded of salt falls
by 5 percent as the price of salt rises by 10
percent. In this case the numerator (5%) is
less than the denominator (10%), so the
demand for salt is inelastic. An economist
could say that elasticity of demand is less
than 1 (if you divide 5% by 10% you get 0.5,
which is less than 1). EXHIBIT 4-5 Elasticity of Demand If demand is . . . That means . . . Elastic Quantity demanded changes by a larger percentage
than price. For example, if price rises by 10 percent,
quantity demanded falls by, say, 15 percent. Inelastic Quantity demanded changes by a smaller percentage
than price. For example, if price rises by 10 percent,
quantity demanded falls by, say, 5 percent. Unit-elastic Quantity demanded changes by the same percentage
as price. For example, if price rises by 10 percent,
quantity demanded falls by 10 percent. Unit-Elastic Demand
Finally, unit-elastic demand exists when
the quantity demanded changes by the same
percentage as price—that is, when the
numerator changes by the same percentage
as the denominator. For example, suppose
the quantity demanded of picture frames
decreases by 10 percent as the price of picture frames rises by 10 percent. The numerator (10%) is equal to the denominator
(10%), so the demand for picture frames is
unit elastic. According to an economist, elasticity of demand would be equal to 1 (10%
divided by 10% equals 1).
When elasticity of demand is greater than
1, we say that demand is elastic. When it is
less than 1, we say that demand is inelastic.
And finally, when it is equal to 1, we say that
demand is unit-elastic. See Exhibit 4-5. Elastic or Inelastic?
So, you’re probably wondering what products are elastic and which ones are inelastic?
One economics study identified oysters,
restaurant meals, and automobiles as goods
with elastic demand. For these goods, price
changes have a strong impact on how much
customers will buy. In the same study, coffee,
gasoline (for your car), physicians’ services,
and legal services were identified as goods
with inelastic demand. For these products a
change in price had less impact on how
much customers will buy.
E X A M P L E : A university raises its
tuition by 10 percent. As a result, the number of students applying to the university falls by 2 percent. In this situation, we would
say that the demand for education at this
particular university is inelastic. Why?
Because the percentage change in quantity
demanded (2%) is less than the percentage
change in price (10%). What Determines Elasticity
of Demand?
The demand for some goods (coffee,
gasoline at the local gas station, physic...

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