Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. The demand curve is inelastic in this area; that is, its elasticity value is less than one.
The demand curve is elastic in this interval. The supply curve is elastic in this area; that is, its elasticity value is greater than one. The supply curve is inelastic in this region of the supply curve. Previous: Introduction to Elasticity Next: 5.
Skip to content Chapter 5. Learning Objectives By the end of this section, you will be able to:. Calculate the price elasticity of demand Calculate the price elasticity of supply. Finding the Price Elasticity of Demand Calculate the price elasticity of demand using the data in Figure 1 for an increase in price from G to H.
Step 1. Is the elasticity the slope? Self-Check Questions From the data shown in Table 2 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H.
Classify the elasticity at each point as elastic, inelastic, or unit elastic. From the data shown in Table 3 about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K, point L to point M, and point N to point P.
Review Questions What is the formula for calculating elasticity? What is the price elasticity of demand? Can you explain it in your own words? What is the price elasticity of supply? Critical Thinking Questions Transatlantic air travel in business class has an estimated elasticity of demand of 0. Why do you think this is the case? What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured elasticity?
How would you explain that? What is the elasticity in moving from a quantity of 5 to a quantity of 6? What is the elasticity of demand as price falls from 5 to 4? It can be elastic or inelastic for a particular commodity. To understand the difference between elastic and inelastic demand, see the article presented hereunder. Basis for Comparison Elastic Demand Inelastic Demand Meaning When a little change in the price of a product results in a substantial change in the quantity demanded, it is known as elastic demand.
Inelastic demand refers to a change in the price of a good result in no or slight change in the quantity demanded. The demand that changes, as the price for product increases or decreases, it is known as elastic demand or price elasticity of demand. Such a demand is termed as price-sensitive demand.
It means a small change in the price of the product may lead to a greater change in the quantity demanded by the consumers, i. On the other hand, if the price drops then the consumers will start buying some more quantity of the product, or it will attract some more customers. The demand is said to be inelastic when the demand for the given product or service does not change in response to the fluctuations in price.
Such a demand is not much sensitive to price. Items for need or necessities are the goods that have inelastic demand, i. Goods that can be substituted easily tend to be more elastic. For example, if the price of donuts goes up significantly, people may start purchasing danishes instead. Therefore, the demand for donuts decreases significantly because people are substituting danishes for donuts.
The amount of income available to spend is another factor. Timing is the last factor. Cigarettes are an obvious example. People may continue to smoke even if the price per pack of cigarettes rises percent. The person may gradually cut back and eventually quit because of the price. The price elasticity of demand is calculated by dividing the percent change in the quantity demanded by the percent change in its price. Companies collect data on consumer response to product price changes and use the information to set their prices accordingly to maximize their profits from that product.
Demand elasticity less than a value of 1 indicates inelasticity. Decreasing the price of the softener will result in only a small increase in demand. If demand elasticity is greater than a value of 1 it is elastic which means it reacts proportionately to higher changes in economic factors.
Reducing the price in this example will produce smaller revenues than if it were elastic.
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