principles of microeconomics: econ102. price elasticity of demand: the responsiveness of the...
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Principles of MicroEconomics: Econ102
Price Elasticity of Demand:
The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price.
Measuring the Price Elasticity of Demand
Relatively Elastic Demand:
Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.
Relatively Elastic Demand and Relatively Inelastic Demand
Relatively Inelastic Demand:
Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.
Unit-elastic Demand:
Demand is unit-elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.
Perfectly Inelastic Demand:
The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
Perfectly Elastic Demand:
The case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity.
1. A 33% cut in price…
Demand
$30
Price
Quantity
20
2816
2. …….causes a 75% increase in quantity demanded.
The Case of Elastic Demand
Therefore, demand is elastic when……
the % change in Qd is greater than the % change in Price resulting in an absolute
value greater than 1
Total Revenue before price cut: =C+D = $480
Demand
$30
Price
Quantity
20
2816
Total Revenue after price cut = D+E = $560
Therefore, cutting price when demand is price elastic……
INCREASES Total Revenue.
A
E=$240D= $320
C=$160 B
Total revenue: The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the
number of units sold.
1. A 33% cut in price…
Demand
$30
Price
Quantity
20
2016
2. …….causes a 25% increase in quantity demanded.
The Case of In-Elastic Demand
Therefore, demand is inelastic when……
the % change in Qd is less than the % change in Price resulting in an absolute
value less than 1
Total Revenue before price cut: =C+D = $480
Demand
$30
Price
Quantity
20
2016
Total Revenue after price cut = D+E = $400
Therefore, cutting price when demand is price inelastic……
REDUCES Total Revenue.
A
E= $80D= $320
C=$160 B
Total revenue: The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the
number of units sold.
1. A 33% cut in price…
Demand
$30
Price
Quantity
20
2416
2. …….causes a 33% increase in quantity demanded.
The Case of Unit-Elastic Demand
Therefore, demand is unit-elastic when……
the % change in Qd is equal to the % change in Price resulting in an absolute
value equal to 1
Total Revenue before price cut: =C+D = $480
Demand
$30
Price
Quantity
20
2416
Total Revenue after price cut = D+E = $480
Therefore, cutting price when demand is unit-elastic……
leaves Total Revenue UNCHANGED
A
E= $160
D= $320
C=$160 B
Total revenue: The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the
number of units sold.
Demand
$30
Price
Quantity
Any increase in price causes quantity demanded to fall to
zero
Perfectly Elastic Demand
If demand is perfectly elastic……
Then the absolute value of price elasticity is equal to infinity.
1. An increase or decrease in price……
Demand
$40
Price
Quantity
30
2. …….leaves the quantity demanded unchanged.
Perfectly In-Elastic Demand
20
If demand is perfectly inelastic……
Then the absolute value of price elasticity is equal to zero.
16
• Availability of Close Substitutes
• Passage of Time
• Luxuries versus Necessities
• Definition of the Market: narrowly defined markets have more substitutes, i.e. cereals
• Share of a Good in a Consumer’s Budget
To estimate the price elasticity of demand, economists need to know the demand curve for a product.
To calculate the price elasticity of demand for new products, firms often rely on market experiments.
With market experiments, firms try different prices and observe the change in quantity demanded that results.
Cross-price Elasticity of Demand:
The percentage change in quantity demanded of one good divided by the percentage change in the price of another good.
Measuring the Cross-Price Elasticity of Demand
IF THEPRODUCTS ARE . . .
THEN THE CROSS-PRICE ELASTICITY OF DEMAND WILL BE. … EXAMPLE
substitutes positive Two brands of digital music players
complements negative Digital music players and song downloads from online music stores
unrelated zero Digital music players and peanut butter
Income elasticity of demand: A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income.
Measuring the Income Elasticity of Demand
IF THE INCOME ELASTICITYOF DEMAND IS . . . THEN THE GOOD IS . . . EXAMPLE
positive, but less than 1 normal and a necessity Milk
positive and greater than 1 normal and a luxury Caviar
negative inferior High-fat Meat
Elasticity and the Disappearing Farm
Price Elasticity of Supply:
The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product’s price.
Measuring the Price Elasticity of Supply
•Whether supply is elastic or inelastic depends on the ability and willingness of firms to alter the quantity they produce as price increases.
•Often, firms have difficulty increasing the quantity of the product they supply during any short period of time.
Why Are Oil Prices So Unstable?Making
the
Connection
Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply
Summary of the PriceElasticities of Supply
Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply
Summary of the PriceElasticities of Supply (continued)
Using Price Elasticity of Supply to Predict Changes in Price
Changes in Price Depend on the Price Elasticity of Supply
