Chapter 4 Section 3 Elasticity of Demand

Demand Elasticity Elasticity= the cause and effect relationship in economics. Demand Elasticity= measure of how much a change in price causes a change in the quantity demanded. Tells how sensitive consumers are to changes.

Elastic Demand When a change in price causes a relatively larger change in quantity demanded, demand is considered to be Elastic. Typical for products like green beans, corn, tomatoes or other fresh garden vegetables.

Inelastic Demand A given change in price causes a relatively smaller change in quantity demanded. Typical for products like table salt.

Unit Elastic Demand Change in price is roughly the same as the change in quantity demanded.

Total Expenditures Test The impact price change has on total expenditures helps us to estimate elasticity. Total expenditures= the amount that consumers spend on a product at a particular price. TE= price X quantity demanded For Elastic demand, change in price and TE are inverse. For Inelastic demand, change in price and TE are directly related. (when one goes up the other goes up)

Elasticity and Profits Companies that sell products that have an elastic demand will lose money from raising prices instead of making more money. Read the example cover story on page 101.