elasticity of demand - loudoun county public schools · elasticity areas of greater inelasticity p...
TRANSCRIPT
Or the Price Elasticity of Demand
Law of Demand = there is an inverse or negative relationship between price and quantity demanded
Price Elasticity measures the effect on
Quantity Demanded due to changes in
Price
In other words, we want to know how big
a change in Qd will occur if we change
the Price.
Price Elasticity of Demand measures the
sensitivity of consumers to a price
change
1) Large changes in qty. demanded due to
price changes = ELASTIC demand
2) Small or no changes in qty. demanded
due to price changes = INELASTIC
demand
Elasticity of Demand =
Ignore the “minus” sign!!!!
= “change”
This is an alternative method if you have a hard time with percentages:
Ed =
∆ Qd ÷ [(Q1+Q2)/2]
∆P ÷ [(P1+P2)/2]
Elastic Demand• % ∆ in price is smaller than % ∆ in Qd, demand
is ELASTIC
OR
• If Ed > 1, then demand is ELASTIC
Inelastic Demand• % ∆ in price is larger than % ∆ in Qd, demand is
INELASTIC
OR
• If Ed < 1, then demand is INELASTIC
What if % ∆ in price EXACTLY equals %
∆ in Qd?
Or, in other words…
Ed = 1?
You have “UNIT ELASTICITY”
Elastic Product
D
D
Normally, a shallower
or less steep demand
curve
Inelastic Product
D
DNormally, a steep
demand curve
Unit elastic Product
D
DNormally, a rounded
demand curve
Perfectly Elastic Product
D
D
A horizontal demand
curve
Perfectly Inelastic Product
D
D
A vertical demand
curve
Another way of determining elasticity is
the Total Revenue Test
Elastic Demand:
Ed is elastic if:
Inelastic Demand:
Ed is inelastic if:
Unit elasticity of Demand:
Ed is unit elastic if:
Substitutability• If # of substitutes is large, then Ed is greater
Proportion of Income• If price increase in relation to consumer
incomes, then Ed is greater
Luxuries vs. Necessities• Luxury items have greater Ed
• Necessity items have a lower Ed
Time• The longer the time period involved, the more
elastic a product demand becomes
D
D
Areas of greater
Elasticity
Areas of greater
Inelasticity
P
Q
Income Elasticity of Demand• Measures the change in quantity demanded as
consumer incomes change
Cross-Price Elasticity of Demand• Measures how the quantity demanded of one
good responds to the change in price of another
good
Elasticity of Income Demand =
Normal goods and IEd = as income increases, Qd
increases, thus a positive income elasticity of demand
Inferior goods and IEd = as income increases, Qd
decreases, thus a negative income elasticity of demand
Cross-Price Elasticity of Demand =
Substitute goods and CPEd = as the price of Good 2
increases, Qd of Good 1 increases, thus a positive CPEd
Complementary goods and CPEd = as the price of Good 2
increases, Qd of Good 1 decreases, thus a negative CPEd
