CONTEMPORARY ECONOMICS© Thomson South-Western 4.2Elasticity 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 4.2Elasticity of Demand  elasticity of demand  total revenue Key Terms

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 3 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

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 4 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

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 5 Elasticity Values Elastic Unit elastic Inelastic

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 6 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.

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 7 Determinants of Demand Elasticity Availability of substitutes Share of consumer’s budget spent on the good A matter of time Some elasticity estimates

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE Millions of gallons per day 0 $ Price per gallon D y D m D w Demand Becomes More Elastic Over Time Figure 4.4

CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 9 Selected Elasticities of Demand ProductShort RunLong Run Electricity (residential) Air travel Medical care and hospitalization Gasoline Movies Natural gas (residential) Figure 4.5