1. Chapter 4.3 notes
Demand Elasticity

2. Demand Elasticity
the extent to which a change in price causes a change in the quantity demanded.
Elastic – when a given change in price causes a relatively larger change in quantity demanded. Ex: green beans, corn, tomatoes, etc.

3. cont’d
Inelastic – a given change in price causes a relatively smaller change in the quantity demanded. Ex: table salt,gas
Unit Elastic – a given change in price causes a proportional change in quantity demanded.

4. Calculating Demand Elasticity
Demand Elasticity = %ΔQd
%ΔP
If the numerator is > denominator = elastic
If the denominator is > numerator = inelastic

5. Total Expenditures Test
determining total expenditures = P x Qd
If demand curve is elastic – when P down, TE up. (inverse) So if price increased, total expenditures would go down.
If the demand curve is inelastic – P down, TE down and vice versa
If the demand curve is unit elastic – total expenditures remain unchanged when price decreases or increases.

6. Total Expenditure
Price
When the price is $4, consumers will demand 100 units, and spend $400 on this good.
Demand $4
100 P
P × Q = $400
(TE)
Quantity Q

7. How TE Changes When Price Changes: Inelastic Demand
An Increase in price from $1
to $3 …
… leads to an Increase in TE from $100 to $240
Demand
Demand $3 80
TE = $240 $1
100
TE = $100
Quantity
Quantity

8. How TE Changes When Price Changes: Elastic Demand
An Increase in price from $4
to $5 …
… leads to an decrease in TE from $200 to $100 $5 20
Demand
Demand
TE = $100 $4 50
TE = $200
Quantity
Quantity
Note that with each price increase, the Law of Demand still holds – an increase in price leads to a decrease in the quantity demanded. It is the change in TR that varies!

9. Determinants of D Elasticity
Necessities vs. Luxuries – Necessities usually inelastic
Substitutes goods/services - If no sub, usually inelastic
Portion of income – if uses a large portion of income, usually elastic

10. Rank the following items from most elastic to least elastic
Honda Accord
Beef
European vacation
Salt
Dijon mustard
steak

11. Results…?
European Vacation
Honda Accord
Dijon mustard
Steak
Beef
salt