2. Elasticity Responsiveness/Sensitivity to Price Changes Explains what will happen to Total Revenue when price changes Q d Explains the strength of consumer response

3. Something that people will buy less of as their incomes increase What is an Inferior Good? I bought Mac and Cheese in college, but refuse to buy it now! What ’ s the difference in my income?

4. Something that people will buy more of as their incomes increase What is a Normal Good? I bought bologna in college, but now I buy steak! What ’ s the difference in my income?

5. Purpose of Measuring Elasticity Law of Demand states as price goes up, quantity demanded goes downLaw of Demand states as price goes up, quantity demanded goes down Elasticity measures how much Q D is effected by priceElasticity measures how much Q D is effected by price Price elasticity of demand: ratio of percent change in Q D to the % change in the price as we move along the curve Price elasticity of demand: ratio of percent change in Q D to the % change in the price as we move along the curve

6. Elasticity of Goods Necessities Necessities Fairly insensitive to price changeFairly insensitive to price change People will still buy b/c they need themPeople will still buy b/c they need them Luxuries Luxuries Very sensitive to price changeVery sensitive to price change Opportunity cost too highOpportunity cost too high In general, the more sensitive, the more elastic the goodIn general, the more sensitive, the more elastic the good

7. Price Elasticity of Demand E d = % change in Q d % change in P % change in P E d = % in Q d % in P

8. Classifying E d E d = 1 Unit-elasticityE d = 1 Unit-elasticity E d > 1 Elastic demandE d > 1 Elastic demand E d < 1 Inelastic demandE d < 1 Inelastic demand

9. Extreme elasticities E d = 0 Perfectly inelastic (vertical demand curve)E d = 0 Perfectly inelastic (vertical demand curve) E d = ∞ Perfectly elastic (horizontal demand curve) (when any price increase causes Qd=0, it’s perfectly elastic )E d = ∞ Perfectly elastic (horizontal demand curve) (when any price increase causes Qd=0, it’s perfectly elastic )