Download Elasticity of Demand

Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of
Price Elasticity of
Demand
20 - 1
Elasticity of
Demand
PRICE ELASTICITY OF DEMAND
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of
Price Elasticity of
Demand
THE LAW OF DEMAND SAYS...
Consumers will buy more when
prices go down and less when
prices go up
HOW MUCH MORE OR LESS?
DOES IT MATTER?
to whom?
Price Elasticity Provides an Answer
20 - 2
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
PRICE ELASTICITY OF DEMAND
Measures Responsiveness to
Price Changes
P
Determinants of
Price Elasticity of
Demand
The percentage change in quantity
The percentage change in price
.01
.02
P2
P1
Q2 Q1
20 - 3
D Elasticity is .5
Q
PRICE ELASTICITY OF DEMAND
Commonly Expressed as…
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
P
Determinants of
Price Elasticity of
Demand
The percentage change in quantity
The percentage change in price
%Q d
% P
P2
P1
Q2 Q1
20 - 4
D Elasticity is .5
Q
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity is...
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of
Price Elasticity of
Demand
Inelastic from 0 to 1
Typical of necessities one must have
Elastic from 1 to 
Typical of luxuries one wants
Unit elastic when exactly = 1
Price change does not reduce total
revenue
20 - 5
PRICE ELASTICITY OF DEMAND
Extreme Cases
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Perfectly Inelastic Demand
P
Determinants of
Price Elasticity of
Demand
D1
Ed = 0
0
Q
Perfectly Elastic Demand
P
Ed = 
20 - 6
0
D2
Q
WHY ARE SOME THINGS MORE
ELASTIC THAN OTHERS?
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Determinants of
Price Elasticity of
Demand
•Substitutability
•Proportion of Income
oLuxuries versus Necessities
•Time
20 - 7
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
P
When prices are
low,
So is total revenue
TR
Determinants of
Price Elasticity of
Demand
D
Q
20 - 8
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
with price to a
P
TR
point...
Determinants of
Price Elasticity of
Demand
D
Q
20 - 9
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of
Price Elasticity of
Demand
D
Q
20 - 10
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of
Price Elasticity of
Demand
D
Q
20 - 11
Quantity Demanded
PRICE ELASTICITY & TOTAL REVENUE
Price Elasticity of
Demand
Price Elasticity and
Total Revenue
Total revenue rises
then declines
with price to a
P
TR
point...
Determinants of
Price Elasticity of
Demand
Total Revenue Test
D
Q
20 - 12
Quantity Demanded