9781118041581

a single monopolist dominates an industry or product line. Other things being

equal, the monopolist’s demand is less elastic (since it is the sole producer)

than the demand facing a particular firm in a multifirm industry.

A third determinant of price elasticity is the proportion of income a con-

sumer spends on the good in question. The issue here is the cost of searching

for suitable alternatives to the good. It takes time and money to compare sub-

stitute products. If an individual spends a significant portion of income on a

good, he or she will find it worthwhile to search for and compare the prices of

other goods. Thus, the consumer is price sensitive. If spending on the good

represents only a small portion of total income, however, the search for sub-

stitutes will not be worth the time, effort, and expense. Thus, other things being

equal, the demand for small-ticket items tends to be relatively inelastic.

Finally, time of adjustment is an important influence on elasticity. When

the price of gasoline dramatically increased in the last five years, consumers

initially had little recourse but to pay higher prices at the pump. Much of the

population continued to drive to work in large, gas-guzzling cars. As time

passed, however, consumers began to make adjustments. Some commuters

have now switched from automobiles to buses or other means of public tran-

sit. Gas guzzlers have been replaced by smaller, more fuel-efficient cars includ-

ing hybrids. Some workers have moved closer to their jobs, and when jobs turn

over, workers have found new jobs closer to their homes. Thus, in the short

run, the demand for gasoline is relatively inelastic. But in the long run, demand

appears to be much more elastic as people are able to cut back consumption

by a surprising amount. Thus, the time of adjustment is crucial. As a general

rule, demand is more elastic in the long run than in the short run.

Other Elasticities

The elasticity concept can be applied to any explanatory variable that affects

sales. Many of these variables—income, the prices of substitutes and comple-

ments, and changes in population or preferences—have already been men-

tioned. (An additional important variable affecting sales is the firm’s spending

on advertising and promotion.) To illustrate, consider the elasticity of demand

with respect to income (Y). This is defined as

in a manner exactly analogous to the earlier price elasticity definition.^9 Income

elasticity links percentage changes in sales to changes in income, all other

EY

% change in Q

% change in Y



¢Q/Q

¢Y/Y

88 Chapter 3 Demand Analysis and Optimal Pricing

(^9) If an infinitesimal change is considered, the corresponding elasticity expression is EY
(dQ /Q)/(dY/Y). In addition, when multiple factors affect demand, the “partial derivative” nota-
tion emphasizes the separate effect of income changes on demand, all other factors held constant.
In this case, we write EY( Q /Q)/( Y/Y).
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