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Price Elasticity of Demand

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 of Demand

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  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. 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

  4. 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

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

  8. 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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