Elasticity (sensitivity)
M=% change in Quantity demanded/ % change in (whatever you interested in) own price (the most import we are going to talk today)
| If m is… | Demand at that point is… | “Picture” | Words | Total Revenue changes |
| >1 | “elastic” | Flat | Sensitive | Delta TR Move in the opposite direction as the changes in price |
| =1 | unit elatic | / | / | / |
| <1 | “inelastic” | Steep | Not very sensitive | Delta TR same in the direction of P |
What impacts m?
(1) Time short-term elasticity is much smaller than long ones (people have more time to response, to change their behavior that cannot be changed immediately)
(2) Budgets
(3) Substitutes (if the cost of being health get higher, you just don’t change your behavior to die, demand for health thus inelastic)
Examples: Apple
P(today)=$4/p Q(today)= 6 bushels
P(tom)=$2/p Q(Tom)= 2 bushels m=Q*w.s/(2-4)=2 (which means if price change, you response as fiercely as twice, absolute value)
*Elasticity is relevant; it depends on current price and quantity. The elasticity of every point on the demand curve is different.
B is more elastic: as you move down from demand curve, more inelastic
M= Big/Small=Big
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