elasticity of demand. what is elasticity of demand? measure of how much quantity demanded respond...
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Elasticity of DemandElasticity of Demand
What is elasticity of demand?
What is elasticity of demand?
Measure of how much quantity demanded respond to changes in price
In other words: if the price of a product rises, the consumers will either buy less or the same amount of the product
Willingness to buy
Measure of how much quantity demanded respond to changes in price
In other words: if the price of a product rises, the consumers will either buy less or the same amount of the product
Willingness to buy
What determines elasticity of demand?
What determines elasticity of demand?
Availability of substitutes Necessities vs. luxuries Definition of market Time horizon
Availability of substitutes Necessities vs. luxuries Definition of market Time horizon
Availability of SubstitutesAvailability of Substitutes
Goods with close substitutes tend to have more elastic demand.
Ex) lemonade and orange juice are substitutes. If the price of lemonade goes up, people will buy more orange juice than lemonade ➔ elastic
Ex) there is no substitute for clocks. Even if price of clock rises, people wil continue to buy clocks ➔ inelastic
Goods with close substitutes tend to have more elastic demand.
Ex) lemonade and orange juice are substitutes. If the price of lemonade goes up, people will buy more orange juice than lemonade ➔ elastic
Ex) there is no substitute for clocks. Even if price of clock rises, people wil continue to buy clocks ➔ inelastic
Necessities Vs. LuxuriesNecessities Vs. Luxuries
Necessities tend to have inelastic demands, and luxuries tend to have elastic demands.
Ex) Water is a necessity. Despite the change of price of water, people will still purchase water ➔ inelastic
Ex) a diamond ring is a luxury good. If it is too expensive, people will not buy it ➔ elastic
Necessities tend to have inelastic demands, and luxuries tend to have elastic demands.
Ex) Water is a necessity. Despite the change of price of water, people will still purchase water ➔ inelastic
Ex) a diamond ring is a luxury good. If it is too expensive, people will not buy it ➔ elastic
Definition of MarketDefinition of Market
Narrowly defined market tend to have elastic demands, and broadly defined market tend to have inelastic demands.
Ex) Car is a broad category. It is inelastic because there are no substitutes.
Ex) Specific brands of car, such as Hyundai and BMW, are narrow category. They are elastic because people will buy cheaper brand of cars.
Narrowly defined market tend to have elastic demands, and broadly defined market tend to have inelastic demands.
Ex) Car is a broad category. It is inelastic because there are no substitutes.
Ex) Specific brands of car, such as Hyundai and BMW, are narrow category. They are elastic because people will buy cheaper brand of cars.
Time horizonTime horizon
Longer time horizon tend to have more elastic demand than shorter time horizon.
Ex) When price of gasoline rises for a few months, people will still pay for it ➔ inelastic
Ex) If price of gasoline continues to rise for two years, people will start to use more public transportation or buy fuel-efficient cars ➔ elastic
Longer time horizon tend to have more elastic demand than shorter time horizon.
Ex) When price of gasoline rises for a few months, people will still pay for it ➔ inelastic
Ex) If price of gasoline continues to rise for two years, people will start to use more public transportation or buy fuel-efficient cars ➔ elastic
How to calculate price elasticity of demand?How to calculate price elasticity of demand?
Price elasticity of demand = % change in quantity demanded / % change in price.
Midpoint method: (Q1-Q2) / {(Q1+Q2)/2}
(P1-P2) / {(P1+P2)/2}Note: the final result of this formula will
be a negative number. In this case, ignore the negative sign.
Price elasticity of demand = % change in quantity demanded / % change in price.
Midpoint method: (Q1-Q2) / {(Q1+Q2)/2}
(P1-P2) / {(P1+P2)/2}Note: the final result of this formula will
be a negative number. In this case, ignore the negative sign.
Price Elasticity of Demand Curve
Price Elasticity of Demand Curve
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Total RevenueTotal Revenue
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Other Demand Elasticity Other Demand Elasticity
Income elasticity of demand
% change in QD
% change in P
Income elasticity of demand
% change in QD
% change in P
Cross-price elasticity of demand
% change in QD of good 1% change in P of good 2
Cross-price elasticity of demand
% change in QD of good 1% change in P of good 2