demand elasticity the responsiveness of demand to changes in price e = (%Δq)/(%Δp)=(Δq/Δp)(p/q)...
TRANSCRIPT
Demand Elasticity The responsiveness of demand to
changes in price E = (%ΔQ)/(%ΔP)=(ΔQ/ΔP)(P/Q)
(ΔQ/ΔP) is the inverse of the slope of the demand curve, a negative constant
(P/Q) is the ratio of price to quantity, always positive, but declines as price falls
E < 0, but the positive |E| is often used AKA “Own-price elasticity of demand”
Watch the video Episode 16: Elasticity of Demand
http://youtu.be/4oj_lnj6pXA
Demand Elasticity & Revenue Total Revenue = P x Q = TR Marginal Revenue = ΔTR/ΔQ
Change in TR divided by change in Q MR = P + (ΔP/ΔQ)Q = P[1 + (1/E)]
MR = 0 when E=-1 (unitary elastic) MR > 0 when E < -1 (elastic) MR < 0 when E > -1 (inelastic) Slope MR = 2 x (slope of demand
curve)
Demand Elasticity &
Revenue
•Total Revenue = P x Q = TR
• Marginal Revenue = ΔTR/ΔQ• Change in TR divided by the change in Q change in total revenue for a change in quantity
• MR = P + (ΔP/ΔQ)Q = P[1+(1/E)]• MR = 0 when E = -1 (unitary elastic)• MR > 0 when E < -1 (elastic)• MR < 0 when E > -1 (inelastic)= P + [ 1 + (1/E)]• Slope MR = 2 x (slope of demand curve)
•e slope of MR = 2 x (slope of the demand curve)
Watch the video Price Elasticity and Total Revenue
http://youtu.be/X9_2noTGge0
Calculating Demand Elasticity Arc elasticity – elasticity over an interval
[ΔQ/(average Q)]/[ΔP/(average P)] Average elasticity between two points Linear or Nonlinear demand curve
Point elasticity – elasticity at a point Price/[Price – (Price intercept)]
Linear demand, or Line tangent to nonlinear demand
Difficult to use in practice because the price intercept is not often known
Arc Elasticity Example P1 = 30, Q1 = 400; P2 =20, Q2 =
600 Arc E =
= =
=
22 21
21
21
21
PP
PP
22030
2030
2600400
600400
25
10
500
200
15
2
5
2
Exercise: fill in the empty cells of table
Price Quantity
Total Revenue
Marginal Revenue
Arcelasticity
60 8 n.a. n.a.
50 16
40 24
Exercise: Answers
Price Quantity
Total Revenue
Marginal Revenue
Arcelasticity
60 8 480 n.a. n.a.
50 16 800 40320/8 = 40
-3.67
40 24 960 20160/8 = 20
-1.8
Point Elasticity Example P0 = 100; PI = 300
P0 is the price point on the demand curve
PI is the intercept of the demand curve on the price axis
Point E = = -1/2 = -0.5
200
100
300100
100
0
0
IPP
P
Factors Affecting Elasticity Availability of Substitutes
More/closer substitutes, more elastic Proportion of Buyer’s Budget
Larger proportion, more elastic Time Period
Longer time to adjust, more elastic
Other Elasticities Income Elasticity of Demand
%ΔQ/%ΔM = (ΔQ/ΔM)(M/Q) Measures shift in demand as income
changes Normal (+) or Inferior (-) goods
Cross-Price Elasticity %ΔQ1/%ΔP2 = (ΔQ1/ΔP2)(P2/Q1) Measures shift in demand for change in
price of a related good Substitute (+) or Complement (-)