Elasticity of Demand Flashcards
demand curve is elastic when
increase in price reduces quantity demanded by a lot
OR
decrease in price increases the quantity demanded by a lot
Quantity is changing A LOT in response to the price
MORE HORIZONTAL - FLATTER
inelastic
same increase in price reduces quantity demanded just a little
or
same decrease in price increases quantity just a little
LESS/NOT Elastic
REPRESENTED BY A VERTICAL SLOPE
elasticity
measure of how responsive quantity demanded is responsive to a change in price
the more responsive the quantity demanded is to a change in price
the more elastic is the demand curve
what determines elasticity?
- availability of substitutes. more substitutes, more elastic the curve
- time horizon will make more elastic
- category of product (broad= less elastic and specific = more elastic)
- necessities (less elastic) vs luxuries (more elastic)
- purchase size - bigger purchases will be more elastic
availability of substitutes
key determinator. for goods with many substitutes, switching brands when price change is easy - so demand is elastic. ex: Colombian coffee, bayer aspirin
fewer substitute- its hard for consumers to adjust when prices change, so demand is inelastic. ex: oil, insulin
time horizon
influences elasticity of demand for good.
immediately following a price increase, consumers may not be able to alter their consumption patterns - making demand inelastic
overtime, consumers can adjust their behavior and find more substitutes. - more elastic
classification of good
influences elasticity of demand for a good.
broader classification - the less likely consumers will be able to find a substitute (making it inelastic) aspirin
narrower- more likely they’ll find a substitute. (elastic) bayer aspirin
ex: bayer aspirin vs all aspirin
you (latter-can still get ibuprofen or acetaminophen)
ex: food- broad vs demand for lettuce (narrow). demand for lettuce is more elastic than the demand for food.
nature of good
necessities - consumers do not change quantity demanded much when the price change (demand is inelastic) - will keep drinking coffee no matter the price
luxuries - consumers will alter behavior when price rises (demand is elastic) - will switch to tea or a cheaper alternative
size of purchase (relative to consumer’s budget)
influences the elasticity of demand
consumers are less concerned about price changes when the good feels cheap (inelastic) - small items in short run
consumers are more concerned about price changes when the good feels expensive (making it elastic) large items
elasticity of demand
percentage change I quantity demanded divided by the percentage change in prince
a firm’s revenue
are equal to price times quantity sold
elasticity has implications on revenue
