Let’s work out a few examples to get a sense of what elasticity of demand means in practice. Remember that in all of these cases, we’re moving along a fixed demand curve—so think of supply increasing or decreasing while the demand curve is staying in the same place.
a. If the elasticity of demand for college textbooks is 20.1, and the price of textbooks increases by 20%, how much will the quantity demanded change, and in what direction?
b. In your answer to part a, was your answer in percentages or in total number of textbooks?
c. If the elasticity of demand for spring break packages to Cancun is 25, and if you notice that this year in Cancun the quantity of packages demanded increased by 10%, then what happened to the price of Cancun vacation packages?
d. In your college town, real estate developers are building thousands of new student-friendly apartments close to campus. If you want to pay the lowest rent possible, should you hope that demand for apartments is elastic or inelastic?
e. In your college town, the local government decrees that thousands of apartments close to campus are uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, should you hope that demand for apartments is elastic or inelastic?
f. If the elasticity of demand for ballpoint pens with blue ink is –20, and the price of ballpoint pens with blue ink rises by 1%, what happens to the quantity demanded?
g. What’s an obvious substitute for ballpoint pens with blue ink? (This obvious substitute explains why the demand is so elastic.)