EC120 Chapter Notes - Chapter 5: Demand Curve
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EC120 Full Course Notes
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Elasticity of demand: elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. Goods with close substitutes tend to have elastic demand because consumers can easily switch from that good to another. Goods with no close substitutes tend to have inelastic demand because consumers cannot easily switch from one good to another: necessities vs. luxuries. Necessities tend to have inelastic demand because as price increases consumers feel that they still need the good. Luxuries have elastic demands because as price increases consumers feel that they don"t need the good anymore. Whether a good is a necessity or a luxury depends on the preferences of the buyer: definition of the market. Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is harder to find close substitutes than it being easier in narrow markets: time horizon.
