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
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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