Chapter 4 Elasticity
Price elasticity of demand- is a unit free measure of the responsiveness of the quantity
demanded of a good to a change in its price.
Perfectly inelastic demand- if the quantity demanded remains constant when price
changes.Examples include insulin.
Unit elastic demand- when quantity demanded equals quantity supplied, the price elasticity
Inelastic demand- when the percentage change in demand is less than the percentage
change in price. Easlistity is between 1 and zero and examples include food and shelter
Perfectly elastic demand - when quantity demanded changes by an infinitely large percentage
in response to a tiny change in price. Example, two soft drink machines with a slight difference
Elastic demand - when percentage change in quantity demanded exceed the percentage
change in price.
The factors that influence the Elasticity of Demand
1. The closeness of the substitute - the closer the substitute for a good, the more elastic is
the demand for it.
2. The proportion of income spent on the good- the greater the proportion of income spend
on a good, the more elastic is the demand for it
3. The time elapsed since the price change- the more time has elapsed since the price
increase the more elastic it becomes.
Total revenue test
1. If a price cut increases total revenue, demand is elastic
2. If price cut decreases total revenue, demand is inelastic
3. If price cut leaves total revenue unchanged, demand is unit elastic
Income elasticity of Demand - is the measure of the responsiveness of the demand for a good
or service to change in income. Positive and greater th