Scribd
Upload
27 views14 pages

Elasticity: Price Elasticity of Demand

Elasticity is a measure of responsiveness - how much one variable changes in response to changes in another. Price elasticity of demand measures how quantity demanded responds to changes in price. There are different types of elasticity including perfectly inelastic, perfectly elastic, inelastic, elastic and unitary elastic. Elasticity can be calculated using percentage changes in quantity and price from a demand schedule or curve. Elasticity may change along a demand curve and impacts total revenue from price changes.

Uploaded by

SZA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
27 views14 pages

Elasticity: Price Elasticity of Demand

Elasticity is a measure of responsiveness - how much one variable changes in response to changes in another. Price elasticity of demand measures how quantity demanded responds to changes in price. There are different types of elasticity including perfectly inelastic, perfectly elastic, inelastic, elastic and unitary elastic. Elasticity can be calculated using percentage changes in quantity and price from a demand schedule or curve. Elasticity may change along a demand curve and impacts total revenue from price changes.

Uploaded by

SZA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 14

Elasticity Price Elasticity of Demand

Slope and Elasticity


Types of Elasticity
Calculating Elasticities
Calculating Percentage Changes
Elasticity Is a Ratio of Percentages
The Midpoint Formula
Elasticity Changes Along a Straight-Line Demand Curve
Elasticity and Total Revenue
Elasticity: A general concept used to quantify the response in one variable when
another variable changes. (with logical relationship)

%A
elasticity of A with respect to B 
%B

Price elasticity of demand: The ratio of the percentage of change in quantity


demanded to the percentage of change in price; measures the responsiveness of
quantity demanded to changes in price.

% change in quantity demanded


price elasticity of demand 
% change in price
Slope and Elasticity
 FIGURE 5.1 Slope Is Not
a Useful Measure of
Responsiveness

Changing the unit


of measure from
pounds to ounces
changes the
numerical value of
the demand slope
dramatically, but the
behavior of buyers in
the two diagrams is
identical.
Range of Elasticity

Range of Elasticity is also known as Types of Price Elasticity (Usually 5 Types)

Perfectly inelastic demand: Demand in which quantity demanded does not respond
at all to a change in price.

Perfectly elastic demand: Demand in which quantity drops to zero at the slightest
increase in price.

A good way to remember the difference between the two perfect elasticities is
Range of Elasticity
 FIGURE 5.2 Perfectly Inelastic and
Perfectly Elastic Demand Curves
Figure 5.2(a) shows a perfectly
inelastic demand curve for insulin.
Price elasticity of demand is zero.
Quantity demanded is fixed; it does
not change at all when price
changes.
Figure 5.2(b) shows a perfectly
elastic demand curve facing a wheat
farmer. A tiny price increase drives the
quantity demanded to zero. In essence,
perfectly elastic demand implies that
individual producers can sell all they
want at the going market price but
cannot charge a higher price.
Range of Elasticity

Elastic Demand A demand relationship in which the percentage change in quantity


demanded is larger than the percentage change in price in absolute value (a demand
elasticity with an absolute value greater than 1).

Inelastic Demand Demand that responds somewhat, but not a great deal, to changes
in price. Inelastic demand always has a numerical value between zero and -1.

Unitary Elasticity A demand relationship in which the percentage change in quantity


of a product demanded is the same as the percentage change in price in absolute
value (a demand elasticity of -1).

A warning: You must be very careful about signs. Because it is generally understood
that demand elasticities are negative (demand curves have a negative slope), they
are often reported and discussed without the negative sign.
The Point Formula-Method

Calculating Percentage Changes


To calculate percentage change in quantity demanded using the initial value as the
base, the following formula is used:

change in quantity demanded


% change in quantity demanded  x 100%
Q 1

Q -Q
 x 100%
2 1

Q 1
The Point Formula-Method

We can calculate the percentage change in price in a similar way. Once again, let us
use the initial value of P—that is, P1—as the base for calculating the percentage. By
using P1 as the base, the formula for calculating the percentage of change in P is

change in price
% change in price  x 100%
P 1

P -P
 2
x 100% 1

P 1
The Midpoint Formula-Method

midpoint formula A more precise way of calculating percentages using the value
halfway between P1 and P2 for the base in calculating the percentage change in
price and the value halfway between Q1 and Q2 as the base for calculating the
percentage change in quantity demanded.

change in quantity demanded


% change in quantity demanded  x 100%
(Q  Q ) / 2 1 2

Q -Q
 2
x 100%
1

(Q  Q ) / 2
1 2
TABLE 5.2 Demand Schedule Elasticity Changes Along a Straight-Line Demand Curve
for Office Dining
Room Lunches
 FIGURE 5.3
Price Quantity Demand Curve for
(per Demanded Lunch at the Office
Lunch) (Lunches per Month) Dining Room
$11 0
Between points
10 2
9 4 A and B, demand
8 6 is quite elastic
7 8 at -6.4.
6 10
5 12
Between points
4 14
16 C and D, demand
3
2 18 is quite inelastic
1 20 at -0.294.
0 22
Elasticity and Total Revenue

In any market, P x Q is total revenue (TR) received by producers:

TR = P x Q
total revenue = price x quantity

When price (P) declines, quantity demanded (QD) increases. The two factors,
P and QD, move in opposite directions:

effects of price changes P  QD 


on quantity demanded:
and
P  QD 
Elasticity and Total Revenue

Because total revenue is the product of P and Q, whether TR rises or falls in response
to a price increase depends on which is bigger: the percentage increase in price or the
percentage decrease in quantity demanded.

effect of price increase on


a product with inelastic demand:  P x QD   TR 

If the percentage decline in quantity demanded following a price increase is larger


than the percentage increase in price, total revenue will fall.

effect of price increase on


a product with elastic demand:  P x QD   TR 
Elasticity and Total Revenue

The opposite is true for a price cut. When demand is elastic, a cut in price increases
total revenues:

effect of price cut on a product


with elastic demand:  P x QD   TR 

When demand is inelastic, a cut in price reduces total revenues:

effect of price cut on a product


with inelastic demand:  P x QD   TR 

You might also like