The law of demand says that when something is more
expensive, we consume less of it
Elasticity = m - %change in QD / %change in whatever
you are interested in
Here’s an example:
-Price elasticity of demand for apples:
Initial price = $1.50/lb Initial
QD = 6 lbs
Final price = $2.00/lb Final
QD = 2 lbs
m = ((2-6)/6)/ ((2.00-1.50)/1.50) = (2/3)/(1/3) = 2
The price elasticity demand for apples at that price is 2. If
it was 10, you would be very sensitive and would probably stop consuming apples.
M:
If (-1 > m < 1) = inelastic = people are NOT very
sensitive to price change = vertical graph (“I”)
If (-1 = m = 1) = unit elastic
If (-1 < m > 1) = elastic = people are very sensitive
to price change = horizontal graph
Impacts of Elasticity:
Time – not
instantaneous
Budget –
some goods are a small portion so price change doesn’t matter
Substitutes
More narrowly define a goods = higher number of substitues
-car, minivan, red ford minivan red ford minivan = highest elasticity – more elasticity
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