{"id":8798,"date":"2018-05-29T20:00:17","date_gmt":"2018-05-29T20:00:17","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-microeconomics\/chapter\/elasticity-of-demand\/"},"modified":"2018-06-08T17:17:59","modified_gmt":"2018-06-08T17:17:59","slug":"elasticity-of-demand","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/cuny-kbcc-microeconomics\/chapter\/elasticity-of-demand\/","title":{"raw":"Elasticity of Demand","rendered":"Elasticity of Demand"},"content":{"raw":"<h2>What you\u2019ll learn to do: explain\u00a0the concept of elasticity<\/h2>\r\nElasticity is an economics concept that measures the responsiveness of one variable to changes in another variable. For example, if you raise the price of your product, how will that affect\u00a0your sales numbers? The variables in this question are <em>price<\/em> and <em>sales numbers<\/em>. Elasticity explains how\u00a0much one variable, say\u00a0sales numbers, will change in response to another\u00a0variable, like the price of the product.\r\n\r\nMastering this concept resembles learning to ride a bike: it's tough at first, but when you get it, you won't forget.\u00a0A rookie mistake is learning the calculations of elasticity but failing to grasp\u00a0the idea. Make sure you don\u2019t do this!\u00a0First take time to understand the concepts\u2014then the calculations can be used simply to explain them in a numerical way.\r\n<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n<li>Describe and give examples of elasticity<\/li>\r\n<\/ul>\r\n<\/div>\r\n[caption id=\"attachment_6396\" align=\"aligncenter\" width=\"360\"]<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1511\/2016\/06\/21212159\/7801525384_e034bb2882_o.jpg\" rel=\"attachment wp-att-6396\"><img class=\"wp-image-6396\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2042\/2018\/05\/29200015\/7801525384_e034bb2882_o.jpg\" alt=\"Photo of Mr. Fantastic action figure.\" width=\"360\" height=\"290\"><\/a> <strong>Figure 1<\/strong>. Mr. Fantastic is elastic.[\/caption]\r\n<p>Think about the word <em>elastic<\/em>. It suggests that an item can be stretched. In economics, when we talk about&nbsp;<strong>elasticity<\/strong><em>,<\/em>&nbsp;we're referring to&nbsp;how much something will stretch or change in response to another variable. Consider a rubber band, a leather strap, and a steel ring. If you pull on two sides&nbsp;of a rubber band (or Mr. Fantastic), the force will cause it&nbsp;to stretch a lot. If you use the same amount of force to pull on the ends of a leather strap, it will stretch somewhat, but not as much as the rubber band. If you pull on either side of a steel ring, applying the same amount of force, it probably won't stretch at all (unless you're very strong). Each of these materials (the rubber band, the leather strap, and the steel ring) displays&nbsp;a different&nbsp;amount of elasticity in response to being pulled, and all three fall somewhere on a continuum from very stretchy (elastic) to barely&nbsp;stretchy (inelastic).<\/p>\r\n<p>There are different kinds of economic elasticity\u2014for example, price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross-price elasticity of demand\u2014but the underlying property is always the same: how responsive or sensitive one thing&nbsp;is to a change in another thing.<\/p>\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7143\r\n<\/div>\r\n<h2>Elastic and Inelastic Demand<\/h2>\r\n<p>Let's think about elasticity in the context of price and quantity demanded.&nbsp;While the law of demand does tell us that more of a good will be bought at a lower price, it does not tell us <em>how much<\/em> the quantity demanded will increase because of the price change. For example, if a store owner raises prices, she can expect that the quantity demanded will drop, but she might not know how sensitive customers will be to the change.&nbsp;How many people will buy her products despite the price increase and how many people will be driven away?<\/p>\r\n<p>If a small change&nbsp;in price creates&nbsp;a large change in the quantity&nbsp;demanded, then we would say that the demand is very <strong>elastic<\/strong>\u2014that is, the demand is very sensitive to a change in price. If, on the other hand, a large change in price results in a very small change in demand in the quantity&nbsp;demanded, then we would say the demand is <strong>inelastic<\/strong>.&nbsp;As we will see later, elastic and inelastic are relative concepts.&nbsp;&nbsp;Here's a&nbsp;way to keep this&nbsp;straight: demand is <strong>in<\/strong>elastic when consumers are <strong>in<\/strong>sensitive to changes in price.<\/p>\r\n<p>Consider the example of cigarette taxes and smoking rates\u2014a classic example of inelastic demand. Cigarettes are taxed at both the state and federal level. As you might expect, the greater the amount of the tax increase, the fewer cigarettes are bought and consumed. While the taxes are somewhat of a deterrent,&nbsp;demand doesn't decrease as much as the price increase, though. We can say, then, that the demand for cigarettes is relatively inelastic.<\/p>\r\n<p>You might think that elasticity isn't an important consideration when it comes to the price of cigarettes. Surely <em>any<\/em> reduction in the demand for cigarettes would be a good thing, right? Does it really matter whether whether the demand is elastic or inelastic? It does. The reason is that taxes on cigarettes serve two purposes: to raise tax revenue for government and to discourage smoking. On one hand, if&nbsp;a higher cigarette tax discourages consumption by quite a lot\u2014meaning a very large reduction in cigarette sales\u2014then the cigarette tax on each pack will not raise much revenue for the government. On the other hand, a higher cigarette tax that does not discourage consumption by much will actually raise more tax revenue for the government (but not have much impact on smoking rates). Thus, when Congress tries to calculate the effects of altering its cigarette tax, it must analyze <em>how much<\/em> the tax affects the quantity of cigarettes consumed. In other words, understanding the elasticity of cigarette demand is key to measuring&nbsp;the&nbsp;impact of taxes on government revenue AND public health.<\/p>\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7144\r\n<\/div>\r\n<p>This issue reaches beyond governments and taxes; every firm faces a similar challenge. Every time a firm considers raising the price that it charges, it needs to know how much a price increase will reduce the quantity of its product that is demanded. Conversely, when a firm puts its products on sale, it wants assurance that the lower price will lead to a significantly higher quantity demanded.<\/p>\r\n<div class=\"textbox learning-objectives\">\r\n<h3>GLossary<\/h3>\r\n[glossary-page][glossary-term]elastic demand: [\/glossary-term]\r\n[glossary-definition]a high responsiveness of quantity demanded or supplied to changes in price[\/glossary-definition][glossary-term]elasticity:&nbsp;[\/glossary-term][glossary-definition]an economics concept that measures responsiveness of one variable to changes in another variable[\/glossary-definition][glossary-term]inelastic demand:&nbsp;[\/glossary-term][glossary-definition]a low responsiveness by consumers to price changes[\/glossary-definition][\/glossary-page]\r\n<\/div>\r\n\r\n","rendered":"<h2>What you\u2019ll learn to do: explain\u00a0the concept of elasticity<\/h2>\n<p>Elasticity is an economics concept that measures the responsiveness of one variable to changes in another variable. For example, if you raise the price of your product, how will that affect\u00a0your sales numbers? The variables in this question are <em>price<\/em> and <em>sales numbers<\/em>. Elasticity explains how\u00a0much one variable, say\u00a0sales numbers, will change in response to another\u00a0variable, like the price of the product.<\/p>\n<p>Mastering this concept resembles learning to ride a bike: it&#8217;s tough at first, but when you get it, you won&#8217;t forget.\u00a0A rookie mistake is learning the calculations of elasticity but failing to grasp\u00a0the idea. Make sure you don\u2019t do this!\u00a0First take time to understand the concepts\u2014then the calculations can be used simply to explain them in a numerical way.<\/p>\n<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Describe and give examples of elasticity<\/li>\n<\/ul>\n<\/div>\n<div id=\"attachment_6396\" style=\"width: 370px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1511\/2016\/06\/21212159\/7801525384_e034bb2882_o.jpg\" rel=\"attachment wp-att-6396\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-6396\" class=\"wp-image-6396\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2042\/2018\/05\/29200015\/7801525384_e034bb2882_o.jpg\" alt=\"Photo of Mr. Fantastic action figure.\" width=\"360\" height=\"290\" \/><\/a><\/p>\n<p id=\"caption-attachment-6396\" class=\"wp-caption-text\"><strong>Figure 1<\/strong>. Mr. Fantastic is elastic.<\/p>\n<\/div>\n<p>Think about the word <em>elastic<\/em>. It suggests that an item can be stretched. In economics, when we talk about&nbsp;<strong>elasticity<\/strong><em>,<\/em>&nbsp;we&#8217;re referring to&nbsp;how much something will stretch or change in response to another variable. Consider a rubber band, a leather strap, and a steel ring. If you pull on two sides&nbsp;of a rubber band (or Mr. Fantastic), the force will cause it&nbsp;to stretch a lot. If you use the same amount of force to pull on the ends of a leather strap, it will stretch somewhat, but not as much as the rubber band. If you pull on either side of a steel ring, applying the same amount of force, it probably won&#8217;t stretch at all (unless you&#8217;re very strong). Each of these materials (the rubber band, the leather strap, and the steel ring) displays&nbsp;a different&nbsp;amount of elasticity in response to being pulled, and all three fall somewhere on a continuum from very stretchy (elastic) to barely&nbsp;stretchy (inelastic).<\/p>\n<p>There are different kinds of economic elasticity\u2014for example, price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross-price elasticity of demand\u2014but the underlying property is always the same: how responsive or sensitive one thing&nbsp;is to a change in another thing.<\/p>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_7143\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7143&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7143\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe>\n<\/div>\n<h2>Elastic and Inelastic Demand<\/h2>\n<p>Let&#8217;s think about elasticity in the context of price and quantity demanded.&nbsp;While the law of demand does tell us that more of a good will be bought at a lower price, it does not tell us <em>how much<\/em> the quantity demanded will increase because of the price change. For example, if a store owner raises prices, she can expect that the quantity demanded will drop, but she might not know how sensitive customers will be to the change.&nbsp;How many people will buy her products despite the price increase and how many people will be driven away?<\/p>\n<p>If a small change&nbsp;in price creates&nbsp;a large change in the quantity&nbsp;demanded, then we would say that the demand is very <strong>elastic<\/strong>\u2014that is, the demand is very sensitive to a change in price. If, on the other hand, a large change in price results in a very small change in demand in the quantity&nbsp;demanded, then we would say the demand is <strong>inelastic<\/strong>.&nbsp;As we will see later, elastic and inelastic are relative concepts.&nbsp;&nbsp;Here&#8217;s a&nbsp;way to keep this&nbsp;straight: demand is <strong>in<\/strong>elastic when consumers are <strong>in<\/strong>sensitive to changes in price.<\/p>\n<p>Consider the example of cigarette taxes and smoking rates\u2014a classic example of inelastic demand. Cigarettes are taxed at both the state and federal level. As you might expect, the greater the amount of the tax increase, the fewer cigarettes are bought and consumed. While the taxes are somewhat of a deterrent,&nbsp;demand doesn&#8217;t decrease as much as the price increase, though. We can say, then, that the demand for cigarettes is relatively inelastic.<\/p>\n<p>You might think that elasticity isn&#8217;t an important consideration when it comes to the price of cigarettes. Surely <em>any<\/em> reduction in the demand for cigarettes would be a good thing, right? Does it really matter whether whether the demand is elastic or inelastic? It does. The reason is that taxes on cigarettes serve two purposes: to raise tax revenue for government and to discourage smoking. On one hand, if&nbsp;a higher cigarette tax discourages consumption by quite a lot\u2014meaning a very large reduction in cigarette sales\u2014then the cigarette tax on each pack will not raise much revenue for the government. On the other hand, a higher cigarette tax that does not discourage consumption by much will actually raise more tax revenue for the government (but not have much impact on smoking rates). Thus, when Congress tries to calculate the effects of altering its cigarette tax, it must analyze <em>how much<\/em> the tax affects the quantity of cigarettes consumed. In other words, understanding the elasticity of cigarette demand is key to measuring&nbsp;the&nbsp;impact of taxes on government revenue AND public health.<\/p>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_7144\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7144&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7144\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe>\n<\/div>\n<p>This issue reaches beyond governments and taxes; every firm faces a similar challenge. Every time a firm considers raising the price that it charges, it needs to know how much a price increase will reduce the quantity of its product that is demanded. Conversely, when a firm puts its products on sale, it wants assurance that the lower price will lead to a significantly higher quantity demanded.<\/p>\n<div class=\"textbox learning-objectives\">\n<h3>GLossary<\/h3>\n<div class=\"titlepage\">\n<dl>\n<dt>elastic demand: <\/dt>\n<dd>a high responsiveness of quantity demanded or supplied to changes in price<\/dd>\n<dt>elasticity:&nbsp;<\/dt>\n<dd>an economics concept that measures responsiveness of one variable to changes in another variable<\/dd>\n<dt>inelastic demand:&nbsp;<\/dt>\n<dd>a low responsiveness by consumers to price changes<\/dd>\n<\/dl>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-8798\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Revision and adaptation. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li>Outcome: Defining Elasticity. <strong>Authored by<\/strong>: Steven Greenlaw and Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Price Elasticity of Demand and Price Elasticity of Supply. <strong>Authored by<\/strong>: OpenStax College. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:EpNx8345@4\/Price-Elasticity-of-Demand-and\">https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:EpNx8345@4\/Price-Elasticity-of-Demand-and<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.44<\/li><li>Cigarette Taxes in the U.S.. <strong>Provided by<\/strong>: Wikipedia. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/en.wikipedia.org\/wiki\/Cigarette_taxes_in_the_United_States\">https:\/\/en.wikipedia.org\/wiki\/Cigarette_taxes_in_the_United_States<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li>Mr. Fantastic. <strong>Authored by<\/strong>: Javi M. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/84578994@N07\/7801525384\">https:\/\/www.flickr.com\/photos\/84578994@N07\/7801525384<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":29,"menu_order":2,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Price Elasticity of Demand and Price Elasticity of Supply\",\"author\":\"OpenStax College\",\"organization\":\"\",\"url\":\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:EpNx8345@4\/Price-Elasticity-of-Demand-and\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.44\"},{\"type\":\"original\",\"description\":\"Revision and adaptation\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Cigarette Taxes in the U.S.\",\"author\":\"\",\"organization\":\"Wikipedia\",\"url\":\"https:\/\/en.wikipedia.org\/wiki\/Cigarette_taxes_in_the_United_States\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Mr. Fantastic\",\"author\":\"Javi M\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/84578994@N07\/7801525384\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"original\",\"description\":\"Outcome: Defining Elasticity\",\"author\":\"Steven Greenlaw and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"ce2cf523-57a5-4f49-ba05-10f33cdf1ff3, 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