Elastic Demand and Inelastic Demand
Calculate the Elasticity from the accompanying diagram
D2 =-0.82 , which means that D2 is inelastic D1 = -3.78, which means that D1 is elastic
Perfect Elastic
Demand curve is a horizontal line. The quantity demanded is largely responsive to price, and the price elasticity of demand equals infinity.
Perfectly Inelastic
Demand curve is vertical line. Price Elasticity of Demand =0
Unit Elastic
Percentage change in quantity demanded is equal to the percentage change in price. Price elasticity of demand equals -1 or 1 in absolute value.
Inelastic Demand
The percentage change in quantity demanded is less than the percentage change in price. Elasticity is less than 1 in absolute value
What is the elasticity of demand if change in quantity is 20% and the change in price is negative 10%?
2
What happens when a demand curve is perfectly elastic?
An increase in price causes the quantity demanded to plummet to zero
How does close substitute affects price elasticity?
Consumer reacts to a change in price of a product depends on the availability of other goods that can be used as a substitute. The more close substitutes that a product or service has, the more elastic the demand curve will be. The fewer closely related products are out there, the more inelastic the demand curve will be. The demand curve for gas is inelastic.
What are the determinants of the price elasticity of demand?
The availability of close substitutes. The Passage of time. Whether the goods is a luxury or necessity. The definition of the market. The Share of the good in the consumer's budget.
Luxury vs necessity ( in terms of price elasticity)
The demand curve for a luxury good is more elastic than the demand curve for a necessity. Example: the demand for bread is inelastic because bread is a necessity, and the quantity that people buy does not depend on price.
Share of a good in a consumer budget
The demand for a good will be more elastic the larger the share of the good in the average consumer's budget.
Definition of the Market
The more narrowly we define a market, the more elastic demand will be. In a narrowly defined market, consumers have more substitutes to chose from. For example,
Passage of time and its influence on elasticity
The more time that passes, the more elastic the demand for a product becomes. Example- If the price of gasoline increases, it takes a whole for consumers to decide to begin taking public transportation, to buy more few-efficient cars, or find new jobs closer to where they live.
Elastic Demand in terms of slope
The smaller the slope, the more elastic is the product
Midpoint Formula
This formula is used to calculate the price elasticity of demand.
Quantity demanded remains relatively constant despite the changes in price of goods/ services
This is what happens whenever u have a good that is not very responsive to a change in price.
Elastic Demand
When percentage change in quantity is greater than the percentage change in price. Price is elastic when the price elasticity is greater than 1 in absolute value.
what happens if the price elasticity of demand is greater than 1?
demand is elastic
what happens if the price elasticity of demand is less than 1?
demand is inelastic
what happens if the price elasticity of demand is equal to infinity?
demand is perfectly elastic
what happens if the price elasticity of demand is equal to zero?
demand is perfectly inelastic
what happens if the price elasticity of demand is 1?
demand is unit elastic
