Own price elasticity of demand: % change in quantity demanded
% change in [whatever you're interested in]
Demand is said to be inelastic when people are not very sensitive to the change in price of a particular good. Demand is said to elastic when people are very sensitive to changes in price of a certain good.
What impacts elasticity?
- Time
- Short run vs. long run
- Budget
- Some goods make up very small portions of your budget so their price change doesn't affect you very much.
- Substitutes
- Price elasticity for your health is very low (basically 0) because your health is important to you, and there are no substitutes.
Someone said, "If the price of salt doubled, I would still consume the same amount of salt. Doesn't this refute the law of demand?"
- NO! Your demand for salt is inelastic because there are no substitutes for salt.
- The law of demand tells us that at some ridiculously high price you'll consume less of a good.
- The more narrowly a good is defined, the more substitutes it has.
Firms are incredibly interested in how elastic their consumer's demand for their good is. Firms can make money by lowering costs of goods because they get more costumers incentivized by lower prices or they can raise prices if costumers are loyal and make more money that way.
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