126 PART • Producers, Consumers, and Competitive Markets Two points should be noted as a result of this analysis: The market demand curve will shift to the right as more consumers enter the market 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 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 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