1 / 23

Price Elasticity of Demand

Price Elasticity of Demand. Formula Interpretation Exercises. Objectives:. Define price elasticity of demand; Compute for the price elasticity of demand; interpret the price elasticity of demand. Price Elasticity of Demand.

holli
Download Presentation

Price Elasticity of Demand

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Price Elasticity of Demand Formula Interpretation Exercises

  2. Objectives: • Define price elasticity of demand; • Compute for the price elasticity of demand; • interpret the price elasticity of demand.

  3. Price Elasticity of Demand • Responsiveness of quantity demand as a result of a change in price

  4. price elasticity of demand Price elasticity of demand = % change in quantity demanded % change in price ED = % Q % P

  5. price elasticity of demand Q2 – Q1 ED = Q P2 – P1 P

  6. Where: • Q2 = new quantity demand • Q1 = initial quantity demand • P2 = new price • P1 = initial price • Q = ave. quantity demand • P = ave. price

  7. Rule: • If Ed = 1, Unitary greater than 1, elastic less than 1, inelastic

  8. Interpretation: • ELASTIC= luxury has close substitutes has many uses

  9. INELASTIC= necessity has no or few substitutes forms an insignificant part of the expenditures

  10. Example: • The price of burger increased from 25 to 30 pesos. The quantity demand dropped from 200 to 150. Is burger a necessity or a luxury?

  11. Solve for Ed and interpret the results. PRICE QUANTITY DEMAND • 10 20 12 10 2. 10 15 15 13

  12. Price Quantity Demand • 25 50 50 25 • 5 20 5 40 5. 5 20 10 20

  13. When the price of rice per kilo rose by 4 pesos from 25 pesos, the quantity demand decreased from 500 kilos to 475 kilos. Compute for Ed. Interpret the result.

  14. Remember Me… • As an entrepreneur, how would you price an elastic and an inelastic good? • Explain.

  15. Price Elasticity of Supply Formula Interpretation Exercises

  16. Objectives: • Define price elasticity of supply; • Compute for the price elasticity of supply; • interpret the price elasticity of supply.

  17. Price Elasticity of Supply • -responsiveness of quantity supply given a change in the price of the product.

  18. price elasticity of supply ES = % Qs % P ES = Q2 – Q1 Q P2 – P1 P

  19. RULE: • When Es > 1, elastic, manufactured good < 1, inelastic, agricultural good = 1, unitary elastic, semi-manufactured or semi-agricultural

  20. Exercises: Solve for Es and interpret the results. • P1= 20 ; Q1 = 100 P2= 25 ; Q2 = 150

  21. 2. When the fishermen learn that the price of tilapia increases from 80 pesos per kilo to 100 , they increase their harvest by 1,000 kilos only from 12,000.

  22. Remember Me… • Suppose you would like to engage in business, which would you opt to produce and sell, an elastic or an inelastic good? Why?

  23. Recap for the two lessons • What is the difference between price elasticity of demand and price elasticity of supply? • As a consumer, how useful is the principle of the price elasticity to you? • How about as an entrepreneur?

More Related