Download Elasticity of Demand (Micro Ch 18- presentation 1 Price Elasticity)

Microeconomics Introduction

Responsiveness or sensitivity of consumers to
a price change


Modest price changes cause very large
changes in the quantity demanded
Ex. Restaurant prices, vacations, soda




Substantial price changes cause only small
changes in the amount purchased
Consumers pay very little attention to the
cost
Ex- toothpaste,
Medicine, tobacco




P- the proportion of income spent on the
good
A- availability of close substitutes (the more
subs. The more elastic)
I- the importance of a good (luxury v
necessity)
D- the ability to delay the purchase (the more
time, the more elastic)
O 18.1
Ed =
Percentage Change in Quantity
Demanded of Product X
Percentage Change in Price
of Product X
Ed =
Change in Quantity Demanded of X
Original Quantity Demanded of X
÷
Change in Price of X
Original Price of X
W 18.1
Ed=
Change in Quantity
Sum of Quantities/2
÷
Change in Price
Sum of Prices/2
W 18.1






A price change from $4-5 is an increase of
25% = ((5-4)/4)
A price change from $5-4 is a decrease of
%20 = ((5-4)/5)
Quantity demanded 10-20
From 10 to 20 is an increase of 100%
From 20 to 10 is a decrease of 50%
This causes the “up versus down problem”


Price and quantity demanded are inversely
related which will mean the price-elasticity
coefficient will be negative
Economists use absolute value to avoid
confusion

Complete the following problem:
Price change from $4-5
Demand change from 10-20

Calculate the


Ed
 Ed= (Chg quant/sum of quant/2) / (Chg





price/sum of price/2)
((20-10)/(20+10/2)) / ((5-4)/(5+4)/2)
= (10/(30/2)) / (1/(9/2))
= (10/15) / (1/4.5)
= .67/.22
=3

Demand is elastic if a specific percentage
change in price results in a larger percentage
change in the quantity demanded
Ex- 2% decline in price of flowers results in a
4% increase in quantity demanded
=.04/.02 = 2

*** d > 1


E


Demand is inelastic if a specific change in
price leads to a smaller percentage change in
quantity demanded
Ex- 2% decline in the price of coffee leads to
a 1% increase in quantity demanded
 Ed = .01/.02 = .5
 Ed < 1


A percentage change in price and the
resulting percentage change in quantity
demanded are the same
Ex- 2% drop in the price of chocolate causes
a 2% increase in quantity demanded
Ed = .02/.02
Ed = 1



Extreme situation where a price change
results in no change at all in the quantity
demanded
Price elasticity coefficient is zero because
there is no response to change in price
Ex- diabetic needing insulin or a heroin
addict needing drugs


Small price reduction causes buyers to
increase their purchases from zero to all they
can obtain
Elasticity coefficient is infinity




Total Revenue is the total amount a seller
receives from the sale of a product during a
particular time period
TR = P x Q
P = Product Price and
Q = quantity sold




Note what happens to total revenue when
prices change?
If TR changes in opposite direction of price,
demand is elastic
If TR changes in the same direction as price,
demand is inelastic
If TR doesn’t change when price changes,
demand is unit-elastic