Download Elastic demand

Unit 8.2
Price elasticity of Demand
Elastic and Inelastic Demand
• Elastic demand means that demand changes by a greater
percentage than the change in price. Ignoring the sign (
minus ), in this case, size of PED is more then 1, but less
than infinity.
∞ > PED > 1
For elastic demand, Price and Total Revenue move
in opposite directions. Means:
Increase in Price → Decrease in Total Revenue (TR=PxQ)
Decrease in Price → Increase in Total Revenue
Elastic demand is represented by shallow (flat)
demand curve.
Price
D
P
D
P1
Q
Q1
Quantity
demanded
• Inelastic demand means that demand
changes by a smaller percentage than the
change in price. Ignoring the sign, PED for
inelastic demand is less then 1, but greater
than zero. Means:
1 > PED > 0
For inelastic demand, Price and Total Revenue
move in same directions. Means:
Increase in Price → Increase in Total Revenue
Decrease in Price → Decrease in Total Revenue
Inelastic demand is represented by steep
(sharp) demand curve.
Price
D
P
P1
D
Q Q1
Quantity
demanded
Factors determining the degree of
Elasticity
1.
Availability of close substitutes (more substitutes, more elastic
demand)
2.
Proportion of income (higher proportion of income spend on good,
higher the elasticity of demand)
3.
4.
5.
6.
Necessity or luxury goods (necessity-inelastic, luxury –elastic)
Addiction (cigarettes, alcohol, coffee-inelastic in demand)
Demand will be elastic if we can postpone purchasing
of the product. If we have to buy it immediately, demand
will be inelastic.
The more narrowly defined a product is, more elastic
will be in demand (demand for Nike will be more elastic than
demand for sneakers in general)
Differences in PED
• The more time we have, demand will be
more and more elastic.
• Elasticity of demand for same products will
not be same in different countries. For
example, luxury goods will be more
inelastic in rich countries than in poor one.
Necessities will be more inelastic in poor
than in rich countries.
Degrees of Elasticity
I
Perfectly elastic demand PED= ∞
(change in price causes a complete change in quantity demanded)
II
III
Elastic demand ∞ > PED > 1
Unit elasticity of demand PED=1
(percentage change in price results in an equal change in demand)
IV
V
Inelastic demand 1 > PED > 0
Perfectly inelastic demand PED=0
(change in price does not causes any change in quantity demanded)
Changes in PED
• The higher the price is, demand will be
more elastic.
Price
Perfectly elastic demand
Elastic demand
Unit elasticity
Inelastic demand
Perfectly inelastic
Quantity
demanded
• The shift in demand curve to the right results in
more inelastic demand. (if more people want to
buy a product- shift of demand curve to the right,
the less sensitive they are to the price).
• The shift of demand curve to the left results in
more elastic demand. (decrease in demand-shift to
the left, more sensitive consumers are to change in
price).