Price Elasticity of Demand Price Elasticity n Measures

  • Slides: 9
Download presentation
Price Elasticity of Demand

Price Elasticity of Demand

Price Elasticity n Measures the relative responsiveness of the change in quantity demanded as

Price Elasticity n Measures the relative responsiveness of the change in quantity demanded as a result of a change in the product’s price n PED = % ∆ quantity demanded % ∆ in price

Elastic Products Very responsive to price change n Usually luxury items (wants); Not necessities

Elastic Products Very responsive to price change n Usually luxury items (wants); Not necessities (needs) n Many substitutes for the product n Consumers have a variety of choices n Takes up large part of budget n

Inelastic Products Not very responsive to price change n These are items of necessity

Inelastic Products Not very responsive to price change n These are items of necessity that do not have many substitutes n Tend to be less expensive than elastic goods. n

Price Elastic or Inelastic? n PED = % ∆ quantity demanded % ∆ in

Price Elastic or Inelastic? n PED = % ∆ quantity demanded % ∆ in price ¨ If price elasticity is GREATER than 1, then it is classified as being price elastic. n >1= price elastic ¨ If price elasticity is LESS than 1, then it is classified as being inelastic. n < 1 = price inelastic

Example n If the price of a car wash increased 10 percent and the

Example n If the price of a car wash increased 10 percent and the quantity demanded decreased 20 percent, the elasticity would be: Price Elasticity = 20% = 2 10% 2 > 1, so the demand for a car wash is price elastic

Practice – calculate price elasticity and determine if these products are price elastic or

Practice – calculate price elasticity and determine if these products are price elastic or inelastic 1. 2. 3. 4. Quantity demanded of car stereo speakers increases 25% after a price drop of 50%. Quantity demanded of motor oil increases 50% after a price drop of 25%. Quantity demanded of car tires increases 10% when the price decreases 30%. Quantity demanded of windshield wipers blades decreases 5% when the price increases 5%.

TOTAL REVENUE Total Revenue (TR)= Price x Quantity Sold

TOTAL REVENUE Total Revenue (TR)= Price x Quantity Sold

Total Revenue and Elasticity n IF price and TR = Elastic Demand n If

Total Revenue and Elasticity n IF price and TR = Elastic Demand n If price and TR = Inelastic Demand