Price elasticity of demand
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Price Elasticity of Demand. 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

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Price Elasticity of Demand

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Price elasticity of demand

Price Elasticity of Demand


Price elasticity

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

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

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

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


Example

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

TOTAL REVENUE

Total Revenue (TR)=

Price x Quantity Sold


Total revenue and elasticity

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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