CONTEMPORARY ECONOMICS © Thomson South-Western

4.2 Elasticity of Demand

Compute the elasticity of demand, and explain its relevance.

Discuss the factors that influence elasticity of demand.

Objectives

CONTEMPORARY ECONOMICS © Thomson South-Western

4.2 Elasticity of Demand

elasticity of demand total revenue

Key Terms

4.2 Elasticity of Demand SLIDE

3

CONTEMPORARY ECONOMICS © Thomson South-Western

Computing the Elasticity of Demand

Elasticity of demand measures the percentage change in quantity demanded divided by percentage change in price.

Elasticity of demand

=

Percentage change in quantity demanded

Percentage change in price

4.2 Elasticity of Demand SLIDE

4

CONTEMPORARY ECONOMICS © Thomson South-Western

The Demand for Pizza

If the price falls from $12 to $9, the quantity of pizza demanded increases from 14 million to 20 million per week

Figure 4.3

4.2 Elasticity of Demand SLIDE

5

CONTEMPORARY ECONOMICS © Thomson South-Western

Elasticity Values

ElasticUnit elasticInelastic

4.2 Elasticity of Demand SLIDE

6

CONTEMPORARY ECONOMICS © Thomson South-Western

Elasticity and Total Revenue

Total revenue is price multiplied by the quantity demanded at that price.

Knowing a product’s elasticity can help businesses with their pricing decisions.

4.2 Elasticity of Demand SLIDE

7

CONTEMPORARY ECONOMICS © Thomson South-Western

Determinants of Demand Elasticity

Availability of substitutesShare of consumer’s budget spent on the

goodA matter of timeSome elasticity estimates

4.2 Elasticity of Demand SLIDE

8

CONTEMPORARY ECONOMICS © Thomson South-Western

50 75 95100 Millions of gallons per day0

$3.50

3.00

Price

per

gal

lon Dy

Dm

Dw

Demand Becomes More Elastic Over Time

Figure 4.4

4.2 Elasticity of Demand SLIDE

9

CONTEMPORARY ECONOMICS © Thomson South-Western

Selected Elasticities of Demand

Product Short Run Long Run

Electricity (residential) 0.1 1.9

Air travel 0.1 2.4

Medical care and hospitalization 0.3 0.9

Gasoline 0.4 1.5

Movies 0.9 3.7

Natural gas (residential) 1.4 2.1

Figure 4.5