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    Elasticity of Demand 4

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    Bundanya Savina
    1) Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. Demand can be elastic, inelastic, or unitary. 2) Elastic demand refers to cases where a small change in price leads to a large change in quantity demanded. Inelastic demand means a large change in price results in a small change in quantity. Unitary elasticity occurs when percentage changes in price and quantity are equal. 3) Close substitutes and infrequently purchased goods tend to have elastic demand, while necessities generally have inelastic demand.

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    Elasticity of Demand 4

    Uploaded by

    Bundanya Savina
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    1) Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. Demand can be elastic, inelastic, or unitary. 2) Elastic demand refers to cases where a small change in price leads to a large change in quantity demanded. Inelastic demand means a large change in price results in a small change in quantity. Unitary elasticity occurs when percentage changes in price and quantity are equal. 3) Close substitutes and infrequently purchased goods tend to have elastic demand, while necessities generally have inelastic demand.

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    1) Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. Demand can be elastic, inelastic, or unitary. 2) Elastic demand refers to cases where a small change in price leads to a large change in quantity demanded. Inelastic demand means a large change in price results in a small change in quantity. Unitary elasticity occurs when percentage changes in price and quantity are equal. 3) Close substitutes and infrequently purchased goods tend to have elastic demand, while necessities generally have inelastic demand.

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    169 views3 pages

    Elasticity of Demand 4

    Uploaded by

    Bundanya Savina
    1) Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. Demand can be elastic, inelastic, or unitary. 2) Elastic demand refers to cases where a small change in price leads to a large change in quantity demanded. Inelastic demand means a large change in price results in a small change in quantity. Unitary elasticity occurs when percentage changes in price and quantity are equal. 3) Close substitutes and infrequently purchased goods tend to have elastic demand, while necessities generally have inelastic demand.

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    of 3

    File C5-207 July 2007 www.extension.iastate.

    edu/agdm

    Elasticity of Demand

    lasticity of demand is an important variation on the concept of demand. Demand can be classified as elastic, inelastic or unitary.

    An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small. The formula for computing elasticity of demand is: (Q1 Q2) / (Q1 + Q2) (P1 P2) / (P1 + P2)

    Close substitutes for a product affect the elasticity of demand. It another product can easily be substituted for your product, consumers will quickly switch to the other product if the price of your product rises or the price of the other product declines. For example, beef, pork and poultry are all meat products. The declining price of poultry in recent years has caused the consumption of poultry to increase, at the expense of beef and pork. So products with close substitutes tend to have elastic demand. Figure 1. Elastic demand

    If the formula creates a number greater than 1, the demand is elastic. In other words, quantity changes faster than price. If the number is less than 1, demand is inelastic. In other words, quantity changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price.

    Elastic Demand
    Elasticity of demand is illustrated in Figure 1. Note that a change in price results in a large change in quantity demanded. An example of products with an elastic demand is consumer durables. These are items that are purchased infrequently, like a washing machine or an automobile, and can be postponed if price rises. For example, automobile rebates have been very successful in increasing automobile sales by reducing price.

    An example of computing elasticity of demand using the formula above is shown below. When the price decreases from $10 per unit to $8 per unit, the quantity sold increases from 30 units to 50 units. The elasticity coefficient is 2.25.

    Don Hofstrand extension value-added agriculture specialist co-director Ag Marketing Resource Center 641-423-0844, [email protected]

    Page 2
    Elasticity example
    P1 = $10 P2 = $8 Q1 = 30 Q2 = 50 (Q1 Q2) / (Q1 + Q2) = (P1 P2) / (P1 + P2) 1 / 4 = 1 / 9 1 x 9 = 4 x 1 (50 30) / (50 + 30) = ($10 - $8) / ($10 + $8) 2.25 20 / 80 $2 / $18

    File C5-207

    9 = 4

    Inelastic Demand
    Inelastic demand is shown in Figure 2. Note that a change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not very responsive to changes in price.
    Figure 2. Inelastic demand

    Examples of this are necessities like food and fuel. Consumers will not reduce their food purchases if food prices rise, although there may be shifts in the types of food they purchase. Also, consumers will not greatly change their driving behavior if gasoline prices rise.

    An example of computing inelasticity of demand using the formula above is shown below. When the price decreases from $12 to $6 (50%), the quantity
    Inelasticity example
    P1 = $12 P2 = $6 Q1 = 40 Q2 = 50 (Q1 Q2) / (Q1 + Q2) = (P1 P2) / (P1 + P2) 1 / 9 = 1 / 3 1 x 3 = 9 x 1 3 9

    of demand increases from 40 to only 50 (25%). The elasticity coefficient is .33.

    (50 40) / (50 + 40) = ($12 - $6) / ($12 + $6) = .33

    10 / 90 $6 / $18

    File C5-207
    This does not mean that the demand for an individual producer is inelastic. For example, a rise in the price of gasoline at all stations may not reduce gasoline sales significantly. However, a rise of an individual stations price will significantly affect that stations sales.
    Figure 3. Unitary elasticity

    Page 3

    Unitary Elasticity
    If the elasticity coefficient is equal to one, demand is unitarily elastic as shown in Figure 3. For example, a 10% quantity change divided by 10% price change is one. This means that a one percent change in quantity occurs for every one percent change in price.

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