Elasticity of Demand
The elasticity of demand is a measure of how responsive the quantity demanded is to a change in price:
Elasticity of demand = the percentage change in quantity demanded divided by the percentage change in price
If the absolute value of the elasticity of demand is <1, the demand curve is inelastic; if it is >1 the demand curve is inelastic; if it is =1, the demand curve is unit elastic.
Alex Tabarrok elaborates in his MRU video (link above right, reference below). He notes that, although elasticity is not exactly the same a the slope of the line, they are related and presents the following simple rule: If two linear demand curves run through a common point, then at any given quantity, the curve that is flatter is more elastic.
Determinants of the elasticity of demand
Tabarrok lists the following determinants:
- Availability of substitutes (the fundamental determinant)
- For goods with fewer substitutes, consumers find it HARD to adjust quantity demanded much when prices change, making demand inelastic
- For goods with many substitutes, switching brands when prices change is EASY, making demand elastic
- Time horizon
- Immediately following a price increase, consumers may not be able to alter their consumption patterns, making demand inelastic
- Over time, however, consumers can adjust their behaviour by finding substitutes, making demand elastic
- Classification of the good
- The broader the classification (e.g., aspirin), the less likely consumers will be able to find a substitute, making demand inelastic
- The narrower the classification (e.g., Bayer aspirin), the more likely consumers will be able to find a substitute, making demand elastic
- Necessity of the good to the consumer
- For necessities, consumers do not change quantity demanded much when price changes, making demand inelastic
- For luxuries, consumers will alter their behaviour when the price rises, making demand elastic
- Size of the purchase relative to consumer’s budget
- Consumers are less concerned about price changes when the good feels inexpensive, making demand inelastic
- Consumers become much more concerned about price when the good feels expensive, making demand elastic
This can be summarized in the following table:
|Fewer substitutes||More substitutes|
|Short run (less time)||Long run (more time)|
|Broader classification||Narrower classification|
|Small part of budget||Large part of budget|
- Which of the following two goods is more likely to be inelastically demanded?
- If the elasticity of demand for college textbooks is -0.1, and the price of textbooks increases by 20%, how much will the quantity demanded change, and in what direction?
Alex Tabarrok, Elasticity of Demand, Marginal Revolution University, 14-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-demand-definition, accessed 28 April 2016.
Atlas topic and subject
Consumer Theory and Elasticity of Demand and Supply (core topic) in Economic Analysis.
Page created by: Ian Clark, last modified on 28 April 2016.
Image: Minute 0.50 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-demand-definition, accessed 28 April 2016.