1. Elasticity

2.  A measure of how much buyers and sellers respond the change in market conditions  It measures HOW MUCH supply & demand respond to changes in “determinants”

3. Elastic  Demand is elastic if quantity demanded responds SUBSTANTIALLY to changes in price  Change in price = LARGE change in quantity demanded

4. Inelastic  Demand is inelastic if quantity demanded responds only slightly to changes in price  Change in price = SMALL change in quantity demanded

5. Demand

6. What determines elasticity of demand?  Necessitites v. Luxuries  Necessitites are inelastic  Ex. Doctor’s office, milk, gas  Luxuries are elastic  Ex. Sailboats

7. What determines elasticity of demand?  Availability of close substitutes  Goods with close substitutes have elastic demand  Ex. Butter v. margarine  Goods WITHOUT close substitutes have inelastic demand  Ex. Eggs

8. What determines elasticity of demand?  Definition of the Market  “narrowly-defined” markets have more elastic demand because they have more substitutes  Ex. white chocolate chip macadamia nut cookies v. food VERSUS

9. What determines elasticity of demand?  Time Horizon  Goods have more elastic demand over longer periods of time  with time, people can more easily adjust their spending habits  Ex. Gas

10. Supply

11. What determines elasticity of supply?  Flexibility of sellers to change amount of the good they produce  Cruise ships v. Donuts

12. What determines elasticity of supply?  Time period  The longer the time being considered, the more elastic the supply  Ex. Cruise ships

13. What does elasticity look like?

14. Perfect Inelasticity Changes in price do not change the quantity Inelastic (looks like an “I”)