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Price Elasticity of DemandPowerPoint Presentation

Price Elasticity of Demand

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Price Elasticity

- Measures the relative responsiveness of the change in quantity demanded as a result of a change in the product’s price
- PED = % ∆ quantity demanded
% ∆ in price

Characteristic of Elastic Products

- Demand is very responsive to price change
- Usually luxury items (wants); Not necessities (needs)
- Many substitutes for the product; Consumers have a variety of choices
- Takes up large part of budget (sometimes)
- Long run demand – more time to react to price changes

Characteristics of Inelastic Products

- Demand is not very responsive to price change
- These are items of necessity that do not have many substitutes
- Tend to take up less of the budget than elastic goods.
- Short run demand – less time to react to price changes

Price Elastic or Inelastic?

- PED = % ∆ quantity demanded
% ∆ in price

- If price elasticity is GREATER than 1, then it is classified as being price elastic.
- >1= price elastic

- If price elasticity is LESS than 1, then it is classified as being inelastic.
- < 1 = price inelastic

- If price elasticity is GREATER than 1, then it is classified as being price elastic.

Example

- If the price of a car wash increased 10 percent and the quantity demanded decreased 20 percent, the elasticity would be:
Price Elasticity = 20% = 2

10%

2 > 1, so the demand for a car wash is price elastic

Total Revenue and Elasticity

- IF price and TR = Elastic Demand
- If price and TR = Elastic Demand
- If price and TR = Inelastic Demand
- If price and TR = Inelastic Demand

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