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Elasticity . . . § …allows us to yze supply and demand with greater precision. § …is a measure of how much buyers and sellers respond to changes in market conditions THE ELASTICITY OF DEMAND § Price elasticity of demand is a measure of how much the ty demanded of a good responds to a change in the price of that good. § Price elasticity of demand is the percentage change in ty demanded given a percent change in the price. The Price Elasticity of Demand and Its Determinants § Availability of Close Substitutes § Necessities versus Luxuries § Definition of the Market § Time Horizon The Price Elasticity of Demand and Its Determinants § Demand tends to be more elastic : l the larger the number of close substitutes. l if the good is a luxury. l the more narrowly defined the market (why?). l the longer the time period. Computing the Price Elasticity of Demand § The price elasticity of demand is computed as the percentage change in the ty demanded divided by the percentage change in price. Percentage change in ty demanded Price elasticity of demand = Percentage change in price Computing the Price Elasticity of Demand Percentage change in ty demanded Price elasticity of demand = Percentage change in price § Example: If the price of an ice cream cone reases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as: (8 −10) 100% 10 −20% −2 (2.20 −2.00) 100% 10% 2.00 Computing the