Price Elasticity of Demand

1. Price Elasticity of Demand

2. 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

3. Elastic Products • 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

4. Inelastic Products • Not very responsive to price change • These are items of necessity that do not have many substitutes • Tend to be less expensive than elastic goods.

5. 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

6. 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

7. Practice – calculate price elasticity and determine if these products are price elastic or inelastic • Quantity demanded of car stereo speakers increases 25% after a price drop of 50%. • Quantity demanded of motor oil increases 50% after a price drop of 25% . • Quantity demanded of car tires increases 10% when the price decreases 30%. • Quantity demanded of windshield wipers blades decreases 5% when the price increases 5%.

8. TOTAL REVENUE Total Revenue (TR)= Price x Quantity Sold

9. 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