What’s in This Chapter?

In Unit 2, we learned that if the price of a product increases, the amount demanded decreases. But how much does it decrease? The “how much” describes the concept of price elasticity of demand. If the price of a product increases and the amount demanded decreases by a lot, then the product is elastic. If it decreases by a little bit, or not at all, then the product is inelastic.

Different products have different elasticities, and different people have different elasticities. Businesses use the various elasticities of people and products to make better decisions about how to maximize their profits. For example, airlines often charge more to business travelers than to tourists, because business travelers have lower price elasticities of demand. Airlines attempt to distinguish between business travelers and tourists by placing restrictions (for example, Saturday stay required) on when and how long people can fly for certain fares. Governments can also use elasticity in determining the amount of tax on a product. There are high taxes on low-elasticity products such as gasoline and cigarettes, because raising taxes on gasoline or cigarettes is expected to not significantly affect the amount of these products demanded.

This unit will also discuss other types of elasticities, such as income elasticity of demand, cross price elasticity of demand, and price elasticity of supply.