Elasticity of Demand

Elasticity of demandHow much more or less demand consumers will have for a product when the price changes.If demand doesn’t change much when the price increases, the demand is inelastic.Think of, say, insulin for a diabetic. Diabetics need it, so even if the price goes up, their demand for it will not go down by much.

Elasticity of demandIf demand doesn’t change much when the price increases, the demand is inelastic.Think of, say, insulin for a diabetic. Diabetics need it, so even if the price goes up, their demand for it will not go down by much.

The more vertical the curve, the more inelastic the demand.

Elasticity of demandDemand is elastic if demand for it changes greatly when there’s a price change.Demand may be high when folders are 10 cents a piece, but plummet if the price goes up to $1.

Elasticity of demandHow much more or less demand consumers will have for a product when the price changes.If demand doesn’t change much when the price increases, the demand is inelastic.Think of, say, insulin for a diabetic. Diabetics need it, so even if the price goes up, their demand for it will not go down by much.

Factors affecting elasticityThere are four big factors affecting elasticity:Availability of SubstitutesIf there are few substitutes for a good, then demand will not likely decrease as price increases. The opposite is also usually true.Gas, cigarettes, certain medications are all examples of inelastic goods because there’s no good substitute for themChips, sodas, lots of electronics are all elastic because there are many substitutes, especially for certain brands.

Elasticity of demandRelative ImportanceAnother factor determining elasticity of demand is how much of your budget you spend on the goodIf a great deal of your budget is devoted to a product, an increase in price will slash your demand as you simply can’t afford as much of it. This would make it elastic.If very little of your budget goes towards the product, then it may be inelastic.

Elasticity of demandNecessities versus LuxuriesWhether a person considers a good to be a necessity or a luxury has a great impact on the good’s elasticity of demand for that person.If you regard a product as a necessity, then your demand for it will be inelastic: you’re willing to pay any reasonable price, e.g. gasoline.If you think it’s a luxury, then your demand is very elastic and it may drop considerably due to an increase in price, e.g. Cowboys tickets.

Elasticity of demandChange over TimeDemand sometimes becomes more elastic over time because people can eventually find substitutes.When gas got more expensive during the 1970’s, people had to wait for more fuel efficient cars to come to market as substitutes for Detroit gas guzzlers. When they came along, gas demand decreased.Demand for a medication may change also when generics or new drugs treating the same condition come to market.

Elasticity of demandHow much more or less demand consumers will have for a product when the price changes.If demand doesn’t change much when the price increases, the demand is inelastic.Think of, say, insulin for a diabetic. Diabetics need it, so even if the price goes up, their demand for it will not go down by much.

Calculating elasticity

Calculating elasticity

Calculating elasticity

Elasticity and RevenueA company needs to pay attention to what the demand curve is for their product.While a business may want to charge more their product, the price increase will lower the demand for it and may subsequently hurt their revenues.Thus, the company may make more selling more at a lower price than less at a higher price.

Elasticity and RevenueWhat price should the pizzeria sell at?

Elasticity and RevenueNote that the more inelastic the demand is, the more that may be charged for it since people will still pay the higher price.