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Elasticity 
Consumers are more sensitive to some price changes than to others. You 
may not want to buy a car if its price goes up 10 percent. But if the price of salt 
goes up 10%, you will pay extra amount rather than go without salt. The degree 
to which changes in price cause changes in quantity demanded is called 
elasticity of demand
. The number of cars demanded changes greatly as car 
prices change; so the demand for cars is highly 
elastic. 
The demand for salt is 


more 
inelastic
: people buy nearly the same amount even though the price of salt 
changes. There are two basic reasons for elasticity of demand. The first 
concerns 
the relationship between income and the cost of the product
. A car, for 
example, may easily cost 50% of your annual income. Salt probably costs less 
than 50% of your annual income. The smaller the proportion of your income 
that a product costs, the more inelastic is its demand. Demand tends to be more 
elastic if the good is a luxuary rather than a necessity. The second reason why 
demand is elastic concerns 
whether or not substitute product is available.
Elasticity
, a measure of how much buyers and sellers respond to changes in 
market conditions, allows to analyze supply and demand with greater precision. 
Ex. 1. Based on your understanding of the text, are the following TRUE or 
FALSE? Explain why. 
1. The concept of elasticity looks at how much one factor changes as a result 
of some other factor changing. 
2. Elasticity, a measure of how much buyers respond to changes in market 
conditions, allows to analyze demand with greater precision. 
3. The smaller the proportion of your income that a product costs, the more 
elastic 
is its demand. 
4. Elasticity is a planning tool for managers. 
Ex. 2. Answer the questions on the text. 
1. What term do economists use to describe the responsiveness of one variable 
(demand) to another variable (price)? 
2. What is called the price elasticity of demand? 
3. What are two basic reasons for elasticity of demand? 
4. What is the equation of the price elasticity of demand (ED)? 

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