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We learned in lesson 3a that when the
price of pizza goes up the quantity demanded goes down.
(What happens to demand when price goes up? . . . .
NOTHING.) So we know when the price of a product goes up
then the quantity demanded goes down, and when the price
goes down the quantity demanded goes up. We called this the
"law of demand" in lesson 3a. What we are going to learn in
lesson 4a is HOW MUCH?
If the price of pizza goes up,
HOW MUCH less will we buy? A LITTLE less or A LOT less?
The price elasticity of demand will answer this
question and it will also explain why farm incomes were high
during a year of a record drought and were low during a year
of a record harvest.
You already understand elasticity.
Think about this:
If the price of gasoline
goes up HOW MUCH less will consumers buy? A little less
or a lot less?
I believe most students will say A LITTLE
less.
If the price of a Big Mac goes up,
HOW MUCH less will consumers buy? A little less or a lot
less?
I bet most of you answered A LOT less.
If the price of salt goes up, how
much less will consumers buy? A little less or a lot
less?
Correct. Only A LITTLE less.
If the price of a new car goes up,
how much less will consumers buy? A little less or a lot
less?
A LOT less.
The price elasticity of demand
measures how responsive consumers are to changes in prices.
Don't confuse elasticity with the law of demand. The law of
demand tells us that when prices go up, the
quantity demanded will go down. Elasticity
tells us HOW MUCH it will go down.
Lesson 3a - law of
demand:
if the P 
Qd 
Lesson 4a - price elasticity of
demand:
if the P
does Qd
or Qd  ?
if price changes, HOW MUCH will the Qd change? A little
or a lot?
In lesson 3a we learned the direction
of the arrows (up or down). In lesson 4a we learn the size
of the arrows (big or small).
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