# Chapter 5: Demand and Supply Elasticity. Elasticity of Demand  Also called Price Elasticity of Demand  Measures consumer responsiveness to change in.

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Chapter 5: Demand and Supply Elasticity

Elasticity of Demand  Also called Price Elasticity of Demand  Measures consumer responsiveness to change in price  Example: If the Price of Pepsi goes up \$0.50, will you continue to purchase Pepsi?  Example: If you the price of insulin decreases 50%, will you buy more insulin?

Types of Elasticity  Based on this equation:  Demand is elastic if coefficient is greater than one  Demand is unit elastic if coefficient is exactly one  Demand is inelastic if coefficient is less than one

Elasticity can also be measured using the Total Revenue Test  Total Revenue is Price X Quantity Sold  (This is NOT the same thing as Profit)  If total revenue increases as prices lower then demand is elastic  If total revenue decreases when prices lower then demand is inelastic

Total Revenue Test PriceQuantityTotal Revenue Marginal Revenue (Extra Revenue) Elastic, Inelastic, or Unit elastic \$141 \$122 \$103 \$84 \$65 \$46 \$27

Total Revenue Test PriceQuantityTotal Revenue Marginal Revenue (Extra Revenue) Elastic, Inelastic, or Unit elastic \$141 \$122\$24 \$103\$30 \$84\$32 \$65\$30 \$46\$24 \$27\$14

Total Revenue Test PriceQuantityTotal Revenue Marginal Revenue (Extra Revenue) Elastic, Inelastic, or Unit elastic \$141 \$122\$24\$10 3\$30\$6 \$84\$32\$2 \$65\$30-\$2 \$46\$24-\$6 \$27\$14-\$10

Total Revenue Test PriceQuantityTotal Revenue Marginal Revenue (Extra Revenue) Elastic, Inelastic, or Unit elastic \$141 \$122\$24\$10Elastic \$103\$30\$6Elastic \$84\$32\$2Elastic \$65\$30-\$2Inelastic \$46\$24-\$6Inelastic \$27\$14-\$10Inelastic

What influences elasticity of demand?  Availability of Substitutes  Many substitutes – Elastic  Few substitutes - Inelastic  Price Relative to Income  Expensive item - Elastic  Inexpensive item - Inelastic  Necessities versus Luxuries  Necessity – Inelastic  Luxury - Elastic  Time Needed to Adjust to a Price Change  Short time after change – elastic  Long time after price change - inelastic

Elasticity of Supply  Availability of inputs  Supply Change  Mobility of inputs  Storage capacity  Time to adjust to a price change  See page 93 for examples

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