(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 151

126 PART 2 • Producers, Consumers, and Competitive Markets
Two points should be noted as a result of this analysis:
1. The market demand curve will shift to the right as more consumers enter
the market.
2. Factors that influence the demands of many consumers will also affect
market demand. Suppose, for example, that most consumers in a particular
market earn more income and, as a result, increase their demands for coffee. Because each consumer’s demand curve shifts to the right, so will the
market demand curve.
The aggregation of individual demands into market demands is not just a
theoretical exercise. It becomes important in practice when market demands are
built up from the demands of different demographic groups or from consumers
located in different areas. For example, we might obtain information about the
demand for home computers by adding independently obtained information
about the demands of the following groups:
• Households with children
• Households without children
• Single individuals
Or, we might determine U.S. wheat demand by aggregating domestic demand
(i.e., by U.S. consumers) and export demand (i.e., by foreign consumers), as we
will see in Example 4.3.

In §2.4, we show how the
price elasticity of demand
describes the responsiveness
of consumer demands to
changes in price.

Elasticity of Demand
Recall from Section 2.4 (page 33) that the price elasticity of demand measures
the percentage change in the quantity demanded resulting from a 1-percent
increase in price. Denoting the quantity of a good by Q and its price by P, the

price elasticity of demand is

EP =

⌬Q
⌬Q/Q
P
= a ba
b
⌬P/P
Q
⌬P

(4.1)

(Here, because ⌬ means “a change in,” ⌬Q/Q is the percentage change in Q.)

Recall from §2.4 that
because the magnitude
of an elasticity refers to its
absolute value, an elasticity
of −0.5 is less in magnitude
than a −1.0 elasticity.

INELASTIC DEMAND When demand is inelastic (i.e., EP is less than 1 in absolute value), the quantity demanded is relatively unresponsive to changes in
price. As a result, total expenditure on the product increases when the price
increases. Suppose, for example, that a family currently uses 1000 gallons of
gasoline a year when the price is $1 per gallon; suppose also that our family’s price elasticity of demand for gasoline is -0.5. If the price of gasoline
increases to $1.10 (a 10-percent increase), the consumption of gasoline falls to
950 gallons (a 5-percent decrease). Total expenditure on gasoline, however,

will increase from $1000 (1000 gallons * $1 per gallon) to $1045 (950 gallons
* $1.10 per gallon).
ELASTIC DEMAND In contrast, when demand is elastic (EP is greater than 1 in absolute value), total expenditure on the product decreases as the price goes up. Suppose
that a family buys 100 pounds of chicken per year at a price of $2 per pound; the
price elasticity of demand for chicken is -1.5. If the price of chicken increases to
$2.20 (a 10-percent increase), our family’s consumption of chicken falls to 85 pounds