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Page 14 Appendix II Price Elasticity The price elasticity of demand is the percentage change in quantity demanded in response to a given change in product price, all other conditions held constant. Price elasticity is normally a negative number, reflecting the inverse relationship between price and quantity in the demand function. Price elasticityis often characterized in reference to its numericalvalue, dropping the negative sign. A price elasticitycoefficient greater than one would indicate strong sensitivityto price changes; a value less than one, weak price sensitivity. An elasticity of zero would indicate complete indifferenceto market price. Customer preferences, the prices of other goods and the number and quality of substitutes all have a major impact on price elasticity. The relative price of a product will itself influence price sensitivity. Because the purchase of a lower-costproduct would deplete less of household income than a higher-cost alternative, inexpensive products are generally less price-sensitivethan expensive ones. Products that have few close substitutes will be less price-sensitive, while goods that have many alternatives will tend to be highly elastic. The estimated demand functions for employment in the bar and restaurant industries used a modified definition of price elasticity. Instead of focusing on the sensitivitybetween price changes and purchase volume changes, the employment functions estimated the linkage between shifts in price and changes in the number of employed industry workers. However, this concept can be converted to the more standard definition of price elasticity by tal�ing into account industry labor productivity. For example, an estimated price elasticity with respect to employment of -0.5, in an industry which has an average annual labor productivity gain of �_��or would yield a price elasticityof demand (output change relative to a price change) of approximately-2.0. Based on research conducted by the U. S.Department of Labor, Bureau of Labor Statistics, productivity gains (output per worker) in the bar/tavern and restaurant industries average appro�mately 1.5 % per year. Income Elasticity The income elasticity of demand measures the response of demand for a product to changes in money income. For the vast maj ority of products in the economy, this elasticity measure is positive. That is, the demand for a product is directly related to changes in buyer income. These types of products are called "normal" goods. A minorityof products in the marketplace have an inverse relationship between demand and money income (a negative income elasticity). These latter products are called "inferior" goods. The estimated income elasticity in the employment demand functions for the bar and restaurant industries reflect the same procedure as discussed above for the price elasticity. That is, the estimated income elasticity measures the change in industry employment in response to a change in money income. Adjusting for industry labor productivity, these estimated elasticities can be converted to the standard definition.