Lecture 5 – Elasticity of Demand

1) Substitutes

2) How broadly or narrowly defined the good is

3) Luxuries versus necessities Price elasticity is higher in the long run – adjustment

Cellphones

Why: people will use telephones (substitute) to make call instead of buying cellphones.

Factor 1: Price elasticity is higher when there are close substitutes available

Does it matter if a good is more or less narrowly defined?

Price elasticity is higher for more narrowly defined goods.

B) Private Planes

1) Why:

2) Factor 3: Price elasticity is higher for luxuries than for necessities

A) Gasoline in long run

1) Why:

2) Factor 4: Price elasticity is higher in the long run

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero:

1) Price elastic of demand = 0

2) D curve = VERTICAL

3) Consumers' price sensitivity = NONE

4) Elasticity = 0

A situation in which an increase or a decrease in price will not significantly affect demand for the product:

1) Price of demand = <1

2) D curve = relatively STEEP

3) Consumers' price sensitivity = relatively LOW

4) Elasticity = <1

The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity:

1) Price of demand = INFINITY

2) D curve = HORIZONTAL

3) Consumers' price sensitivity = EXTREME

4) Elasticity = INFINITY

A situation in which consumer demand is sensitive to changes in price:

1) Price of demand = > 1

2) D curve = relatively FLAT

3) Consumers' price sensitivity = relatively HIGH

4) Elasticity = > 1