5 Elasticity of Demand Farid Abolhassani Learning Objectives
5 Elasticity of Demand Farid Abolhassani
Learning Objectives After working through this chapter, you will be able to: �Define price elasticity of demand (PED) �Calculate PED over a portion of the demand curve �Describe the relationship between PED and revenue �Decide when an increase in price will increase revenue
Key Terms Cross-elasticity of demand: The percentage change in quantity demanded of the commodity divided by the percentage change in the price of another related commodity. Income elasticity of demand: The percentage change in quantity demanded of the commodity divided by the percentage change in population income. Price elastic: When quantity demanded is relatively responsive to price changes. When price elasticity of demand is greater than one. Price elasticity of demand: The relative responsiveness of the quantity demanded of a good to a change in its price. It is the percentage change in quantity demanded divided by the associated percentage change in price. Price elasticity of supply: The percentage change in quantity supplied of a commodity divided by the percentage change in the
How a Change in Supply Changes Price and Quantity
Price Elasticity of Demand The price elasticity of demand is a unitsfree measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers’ plans remain the same.
Calculating Price Elasticity of Demand
Inelastic and Elastic Demand PID PED ID UED ED
Elasticity Along a Linear Demand Curve
Determinants of Elasticity along a Linear Demand Curve P B q - ∆q p + ∆p ∆p A q p ∆p C ∆q ∆q q + ∆q p - ∆p Q
Revenue Elasticity and Total Revenue
The Factors That Influence the Elasticity of Demand �The closeness of substitutes: The closer the substitutes for a good or service, the more elastic is the demand for it �The proportion of income spent on the good: The greater the proportion of income spent on a good, the more elastic is the demand for it �The time elapsed since a price change: The longer the time that has elapsed since a price change, the more elastic is demand
Cross Elasticity of Demand The cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, complement other things remaining the same It is positive for a substitute and negative for a com
Income Elasticity of Demand The income elasticity of demand is a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same
Classification of Goods from Income Elasticity Point of View �Positive �Greater than 1: Normal good, income elastic (international travel, jewellery) �Less than 1: Normal good, Income inelastic (food, clothing, newspapers, and magazines) �Negative: Inferior good (used clothes)
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