Title: Price Elasticity of Demand: Lesson objectives
1Price Elasticity of Demand Lesson objectives
- Explain why elasticity is a measure of
responsiveness. - Analyze the elasticity of a product using the
common sense test, total revenue test and
elasticity coefficient. - Understand the factors that determine demand
elasticity - Understand using the total revenue test and
elasticity coefficient that a demand curve with a
constant slope does not have constant elasticity.
2Elasticity of Demand
- -The change of quantity demand relative to the
change in price. - -The responsiveness of quantity demanded to a
change in price.
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4Elasticity of Demand!! Who Cares?
- Why is it important that firms understand the
concept of elasticity of demand? - Why is it important that governments understand
the concept of elasticity of demand?
5Different Elasticities
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8Three Tests for Elasticity
- Common Sense Test
- Total Expenditure/Total Revenue Test
- Elasticity Coefficient Test
9Common Sense Test
- Is it a necessity?
- Are there poor Substitutes?
- Do you need it now?
- Does it take a small portion of your income?
- New Car
- Pork chops
- European Vacation
- Coffee
- Insulin
- Insulin at one of four drugs stores in a shopping
mall.
10Total Revenue/Expenditure Test
11The Elasticity Coefficient
12The Midpoint Formula(Because of the negative
nature of the demand curve, we can use all
absolute values.)
13If Ed gt 1
- Demand is price Elastic
- The change is quantity is greater that the
Change in price
14If Ed 1
- Demand is Unit Elastic
- The change in quantity is equal to the change
in price.
15If Ed lt 1
- Demand is price inelastic
- The change in quantity is less than the
change in price. - Or.. The change in price is greater than the
change in quantity.
16Ed 0
- Demand is Perfectly inelastic
- A change in price creates no change in quantity.
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18Other Elasticities
- Income Elasticity of Demand
- Cross Elasticity of Demand
- Elasticity of Supply
19Income Elasticity of Demand(Keep all signs!!)
- The Relationship between the change in quantity
demanded of a good and the change in income. - If ed is negative then the good is inferior.
- If ed is positive then the good is normal.
20Cross Elasticity of Demand(Keep all Signs!!)
- The relationship between and change in price of
one good and the change in quantity demanded of
another. - If cross elasticity of demand is negative the two
goods are complements. - ?QdX is negative positive ? PY is positive
negative - If cross elasticity of demand is positive the two
goods are substitutes. - ?QdX is positive negative ? PY is positive
negative
21Elasticity of Supply(Because of the positive
relationship of the supply curve, all values are
absolute.)
- Same rules apply as with price ed.
- Supply elasticity depends largely upon the
response of inputs to a change in price. - The quicker inputs can produce more are greater
quantity of output as price increases, the more
elastic the supply curve will be.