1. 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

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

3. 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

4. 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

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

6. 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.

7. 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

8. CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 8 507595100 Millions of gallons per day 0 $3.50 3.00 Price per gallon D y D m D w Demand Becomes More Elastic Over Time Figure 4.4

9. CONTEMPORARY ECONOMICS© Thomson South-Western 4.2 Elasticity of Demand SLIDE 9 Selected Elasticities of Demand ProductShort RunLong Run Electricity (residential)0.11.9 Air travel0.12.4 Medical care and hospitalization0.30.9 Gasoline0.41.5 Movies0.93.7 Natural gas (residential)1.42.1 Figure 4.5