1. 1 Price Elasticity of Demand  In order to predict what will happen to total expenditures,  We must know how much quantity will change when the price changes  Price elasticity of demand is  the percentage change in the quantity demanded that results from a one-percent change in its price

2. 2 Price Elasticity of Demand

3. 3 Price Elasticity  Elastic – quantity changes by a lot when price changes even a little  price elasticity is greater than one  Inelastic – quantity changes by a little when price changes even a lot  price elasticity is less than one  Unit elastic – quantity change = price change  price elasticity equals one  When calculating price elasticity of demand, you will always get a negative- WHY?  For convenience we will take the absolute value

4. 4 Price Elasticity and Expenditures  For an elastic product  Quantity demanded is highly responsive  Percentage change in quantity dominates  An increase in price will reduce total expenditure  A decrease in price will increase total expenditure  For an inelastic product  Quantity demanded is not responsive  Percentage change in price dominates  An increase in price will increase total expenditure  A decrease in price will decrease total expenditure

5. 5 Fig. 5.12 Graphical Interpretation of Price Elasticity of Demand

6. 6 Other Elasticities of Demand  Income Elasticity of Demand  The amount by which the quantity demanded changes in response to a one- percent change in income  Positive for normal goods  Negative for inferior goods

7. 7 Other Elasticities of Demand  Cross Price Elasticity of Demand  The amount by which the quantity demanded of one good changes in response to a one-percent change in the price of another good  Positive for substitutes  Negative for complements

8. 8 Perfect Elasticity  Perfectly Elastic demand  Price elasticity of demand is infinite  Even the slightest change in price leads consumers to find substitutes  Perfectly Inelastic demand  Price elasticity of demand is zero  Consumers do not switch to substitutes even when price increases dramatically  Do goods like these exist?

9. 9 Fig. 5.14 Perfectly Elastic and Perfectly Inelastic Demand Curves