3.03 Notes Guide
Elasticity of Demand
Normal Goods vs. Inferior Goods
Before we get to elasticity, we need to mention 1. Normal Goods and 2.Inferior Goods.
Goods can be classified as normal goods or inferior goods. This classification has nothing to do with the quality of a good, but rather with whether we buy more or less of a good depending on our income.
Most goods are normal goods. If we make more money, we will purchase more of that good.
Example: 3. Movie Tickets
Other goods, inferior goods, show an opposite trend. When our income decreases, we purchase more of these products because it is more cost effective.
Demand is 7. Elastic when a change in price causes a large change in demand.
Demand Elasticity Continued
Demand is 8. Inelastic when a change in price causes a small change in demand.
Demand is 9. Unit elastic when a change in price causes a proportional change in demand.
Determinants of Demand Elasticity
There are three questions about a product that give us a reasonably good idea as to a product’s demand elasticity.
The Total Expenditures Test
Price x Quantity = 13. Total Expendures
Understanding the relationship between elasticity and profits can help producers effectively price their products.
Review What You Learned
Explain the three determinants of demand elasticity.
Explain why an item that has many close substitutes tends to have an elastic demand.
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