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Date: 2015-10-07; view: 399.

Part_4_Lesson_1_Text 3 (Стр. 319 – 330)

Elasticity Of Demand

The shape and slope of demand curves for different products are often quite different. If, for example, the price of a quart of milk were to triple, from $.80 to $2.40 a quart, people would buy less milk. Similarly, if the price of all cola drinks were to jump from $1 to $3 a quart (an identical percent increase), people would buy less cola. But even though both prices changed by the same percentage, the decrease in milk sales would probably be far less than the decrease in cola sales. This is because people can do without cola more easily than they can do without milk. The quantity of milk purchased is less sensitive to changes in price than is the quantity of cola. Economists would explain this by saying that the demand for cola is more elastic than the demand for milk.

Elasticity describes how much a change in price affects the quantity demanded.

How Elasticity is Measured

When the demand for an item is inelastic, a change in price will have a relatively small effect on the quantity demanded. When the demand for an item is elastic, a small change in price will have a relatively large effect on the quantity demanded.

Elasticity can also be measured by the «revenue test.» Total revenue is equal to the price multiplied by the number of units sold.

If, following a price increase, total revenue falls, the demand would be described as elastic. If total revenue were to increase following a price increase, the demand would be be inelastic. Similarly, if total revenue increased following a price decrease, demand would be elastic. If the price decrease led to a decrease in total revenue, the demand for the item would be described as inelastic.

Why the Demand for Some Goods and Services Is Inelastic

The demand for some goods and services will be inelastic for one or more of the following reasons:

• They are necessities.

• It is difficult to find substitutes. Cola drinkers can switch to other soft drinks, but there are few substitutes for milk.

• They are relatively inexpensive. People are less apt to change their buying habits when the price of something that is relatively inexpensive is increased or decreased. If, for example, the price of an item were to double from 10 cents to 20 cents, it would have less of an effect on demand than if the price had gone from $250 to $500.

• It is difficult to delay a purchase. When your car is running out of gas you will buy it at the nearest gas station at any price.

Changes in Demand

Until now, we have been describing the relationship between an item's price and the quantity of an item people will purchase. Sometimes things happen that change the demand for an item at each and every price. When this occurs, we have an increase or a decrease in demand.

What are some of the factors that would cause the demand for ice cream, or any other product, to increase or decrease at each and every price?

Substitutes

When two goods satisfy similar needs, they are described as substitutes. A change in the price of one item will result in a shift in the demand for a substitute.

Black and brown shoes are close substitutes. If the price of black shoes goes up, then people will tend to substitute brown shoes for black shoes, and the demand curve for brown shoes will shift out at every price. If the price of black shoes goes down, then people will tend to substitute black shoes for brown shoes, and the demand curve for brown shoes will shift in at every price.