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Section 3 Elasticity

Section 3 Elasticity. Presented by MOHAMED ABD-ELMOHSEN Assistant lecture Economic department Faculty of commerce Suez canal university. (PED) Definition.

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Section 3 Elasticity

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  1. Section 3 Elasticity Presented by MOHAMED ABD-ELMOHSEN Assistant lecture Economic department Faculty of commerce Suez canal university

  2. (PED) Definition The price elasticity of demand (PED)is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. • Calculating Elasticity The price elasticity of demand is calculated by using the formula: Percentage change in quantity demanded Percentage change in price

  3. If the quantity demanded doesn’t change when the price changes, the price elasticity of demand is zero and the good as a perfectly inelastic demand. • If the percentage change in the quantity demanded equals the percentage change in price, the price elasticity of demand equals 1 and the good has unit elastic demand. • Between the two previous cases, the percentage change in the quantity demanded is smaller than the percentage change in price so that the price elasticity of demand is less than 1 and the good has inelastic demand.

  4. If the percentage change in the quantity demanded is infinitely large when the price barely changes, the price elasticity of demand is infinite and the good has • perfectly elastic demand • If the percentage change in the quantity demanded is greater than the percentage change in price, the price elasticity of demand is greater than 1 and the good has elastic demand. • If demand is elastic, a 1 percent price cut increases the quantity sold by more than 1 percent, and total revenue • increases.

  5. If demand is inelastic, a 1 percent price cut decreases the quantity sold by more than 1 percent, and • total revenues decreases. • If demand is unitary elastic, a 1 percent price cut increases the quantity sold by 1 percent, and total revenue • remains unchanged. • If a price cut increases total revenue, demand is • elastic • If a price cut decreases total revenue, demand is • inelastic. • If a price cut leaves total revenue unchanged, demand is • unit elastic

  6. Types of price Elasticity Demand(PED)

  7. 1- Calculate the Price elasticity of demand when: • The price fall from $25 to15. B. The price fall from $15 to 10. C. The price fall from $10 to 0. D. Interpret your results in a, b, and c.

  8. A)Fall from 25 - 15 B) fall from 15 to 10 PED= ( %∆ Q) / (% ∆ p) (%∆ Q)= (QD(N) – QD(O) )/ QD(avreg) ∆ Q = (20-0 ) ∕ 10 =2 (% ∆ p)= (P(N) –p(o) ) / Op = (15- 25) / 20 = - 0.5 PED= (2∕- 0.5) =- 4 When the price increase about 1% the demand fall about 4 % (Elastic) & indirect relation between price & QD PED= ( %∆ Q) / (% ∆ p) ∆ Q= (QD(N) – QD(O) )/ QD(avereg) %∆ Q= (30-20)/25 = 0.4 ∆ p= (10-15)/ 12.5= -0.4 PED=(0.4 / -0.4 ) PED= -1 When the price increase 1% the demand fall 1% (unit Elastic)

  9. C- The price fall from $10 to 0. PED= ( %∆ Q) / (% ∆ p) %∆ Q= (QD(N) – QD(O) )/ QD(avreg) %∆ Q= (50-30)/40 = 0.5 %∆p =( p(n) - p(o) ) p(avredge) ∆p = (0 -10 ) /5 = -2 PED= (0.5/ -2) = - 0.25 When the price rise about 1% the quantity fall about 0.25% (inelastic) When the price rise about 1% the quantity fall about 0.25% (inelastic)

  10. 2)The price elasticity of demand is defined as the magnitude of A)The change in quantity demanded divided by the change in price B)The change in price divided by the change in quantity demanded C)The percentage change in quantity demanded divided by the percentage change in price D)The percentage change in price divided by the percentage change in quantity demanded

  11. 3) If a 20 percent increase in the price of a used car results in a 10 percent decrease in the quantity of used cars demanded, then the price elasticity of demand equals A) 0.5. B) 1.0. C) 2.0. D) 10.0.

  12. 4) The demand schedule for hotel rooms is: A- What happens to total revenue if the price falls from $400 to $250? B- What happens to total revenue if the price falls from $250 to $200? C- At what price is the total revenue at a maximum? Explain and interpret your answer? D- Is the demand for hotel room’s elastic, unit elastic, or inelastic?

  13. A-if the price falls from $400 to $250? ( nothing change in Total revenue )b- price falls from $250 to $200? (nothing change)c- Total Revenue is constant at all points • Because, The percentage change in quantity demanded = the percentage change in price • D- the demand for hotel room’s is unit elastic

  14. 5) Consider the market of CDs Qd= 120 – 10 p Qs= 30p Equilibrium price=3, Equilibrium Q= 90 A- Find the equilibrium price and equilibrium quantity. B- Find the Price Elasticity of Demand (PED) at equilibrium. C- Find the Price Elasticity of Supply (PES) at equilibrium.

  15. PED= ( %∆ Q) / (% ∆ p) ( %∆ Q)= (QD(n)- QD(o) )/ QD(avre) = (80- 100) /90 = -0.2222 (%∆ p)= (P(n) – p(o))/ p (avre) = (4-2 )/3 = 0.66666667 PED= (-0. 22/ 0.66) = -0.33 PES = ( %∆ QS) / (% ∆ p) ( %∆ QS)= QS(n)-QS(o) )/ QS (avre) = (120-60)/ 90= 0.666666667 (% ∆ p)= (P(n) – p(o) )/ p (avre) = (4- 2)/ 3 = 0.66666667 PES= (0.666/ 0.666) = 1

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