1. Elasticity of Demand Chapter 5

2. Slope of Demand Curves All demand curves do not have the same slope Slope indicates responsiveness of buyers to a change in price D1D1 D1D1 D1D1 Which demand curve is most sensitive to price changes?

3. ELASTICITY OF DEMAND Elasticity of demand (E d ) measures the sensitivity of quantity demanded in response to a change in price: If Price ↑ 10% & Qty Demanded ↓ 15%, then E d = ____ When E d > 1 demand is sensitive to price changes (i.e. elastic demand ) E d = % ∆ Qty D % ∆ P When price rises => Quantity Demanded falls

4. 3 Types of Demand Curves Elastic Demand –Quantity demanded responds stronger than price change –Example: If Price ↑ 25% => Quantity Demanded must ↓ by MORE than 25% –E d is > 1 (E d = % ∆ Qty D/ %∆ P) Inelastic Demand –Quantity demanded responds weaker than price changes –E d < 1 Unit Elastic Demand –Quantity demanded changes the same percentage as price changes –E d = 1 (i.e. If Price ↓10% => Quantity Demanded ↑10%)

5. Determinants of Elasticity of Demand Number of Close Substitutes (what else can you buy) Necessities vs. Luxuries (do you have to have it?) Proportion of Income (is it expensive) Time Horizon (when do you need it?) D1D1 D1D1 Inelastic Elastic Demand more elastic when: Larger # of substitutes Good is a luxury Larger proportion income Longer time period

6. Price Elastic or Price Inelastic? Soda Heart Surgery Table Salt Gasoline Price Inelastic Necessity & No real substitutes Price Inelastic Necessity & No real substitutes, Short time period Price Elastic Many substitutes Price Inelastic Small proportion of income, no good substitute

7. Worksheet #1 Lesson 4, Activity 18

8. 2010 Economy Stock Market- good year SP500 +13.0% Unemployment fell from 10.0% to 9.8% GDP growth +3.0% Fed Funds Rate 0.00  0.00% 2011 Economy Stock Market- unchanged SP500 +0.0% Unemployment fell from 9.8% to 8.6% GDP growth +1.5% Fed Funds Rate 0.00  0.00% Debt = 10 Trillion Debt = 15.2 Trillion