Price Elasticity of Demand
When is a demand curve elastic?
A demand curve is elastic when a change in PRICE affects the QUANTITY DEMANDED a lot
What is perfectly elastic?
When any price increase will cause the quantity demanded to drop to zero Perfectly elastic = Horizontal line
What does a UNIT ELASTICITY of demand look like on graph?
for example: A 20% increase in price generate a 20% decrease in the quantity of crossing demanded
When the patent expires on a brand-name drug and five generic drugs come on the market, what happens to elasticity of demand? It rises. It falls
it rises
So an increase in price will cause
only a slight reduction in the quantity demanded.
Price elasticity of demand measuring =
the percentage change in quantity demanded divided by the percentage change in price.
When price is inelastic....
the price effect DOMINATES the quantity effect
What is inelastic demand?
when price elasticity of demand = 0.5
What is Perfectly Inelastic?
when the quantity demanded DOES NOT respond at all to changes in the price The demand curve is Vertical. Like an I
The availability of close substitutes is very important.
Fewer substitutes makes it harder for consumers to adjust Q when P changes, so demand is inelastic. Many substitutes? Switching brands when prices change is EASY, so demand is elastic.
Total revenue by AREA
$.90 price and 1100 quantity Total revenue= price x quantity= $990
How does inelastic demand looks on graph
An increase in price leaves the quantity demanded unchanged
How does elasticity looks on graph
At any price above "$5" quantity demanded is zero. At exactly $5, consumers will buy any quantity. Below $5. quantity demanded is infinite
What is Elastic Demand?
Elastic demand = 2
Whether the good is a necessity or a luxury also affects the elasticity of demand.
For necessities, we do not change Q much when P changes. For luxuries, we are more sensitive to P changes.
example of Price elasticity and measuring it
If the price of oil increases by 10% and the quantity demanded falls by 5%, then the price elasticity of demand for oil is: -5% divided by 10% = -0.5
The length of time elapsed since the price change matters.
Less time to adjust means lower elasticity. Over time consumers can adjust their behavior by finding substitutes (making demand more elastic).
Effect of a price increase on TOTAL REVENUE
Price effect of price increase: higher price for each unit sold Quantity effect of price increase: fewer units sold
Price elastic demand
price elasticity of demand = >1 more than 1
example practice quantity is 6 for $60 and 12 for 40 If price falls from $60 to $40, total revenue changes by _______, so demand is _______.
$120 elastic
Example of Elastic Demand
A 20% increase in price generates 40% decrease in the quantity of crossings demanded
Example of inelastic demand
A 20% increase in the price generates a 10% decrease in the quantity of crossing demanded
When is a demand curve inelastic?
A demand curve is inelastic when the SAME change in price changes the QUANTITY DEMANDED just a little
The share of income spent on the good matters.
We are less sensitive to price changes when the good feels inexpensive. We are more sensitive to price changes when the good feels expensive.
What Factors Determine the Price Elasticity of Demand?
availability of close substitutes Whether the good is a necessity or a luxury share of income spent on the good The length of time elapsed since the price change matters.
The price INCREASE
causes a big decrease in quantity demanded if demand is ELASTIC causes a small decrease in quantity demanded if demand is INELASTIC
The elasticity of demand for eggs has been estimated to be 0.1. If egg producers raise their prices by 10 percent, what will happen to their total revenue?
it will increase
Perfectly inelastic demand
price elasticity of demand = anything less than 1
Economist are interested in...
price elasticity of demand. Estimating elasticity is crucial to understanding and predicting market outcomes.
What is total revenue?
price times quantity demanded (sold). TR= price x quantity
If demand is unit-elastic = 1
quantity effect = price effect. So an increase in price exactly balances the reduction in the quantity demanded. In this instance, total revenue doesn't change. `
if the [Ed] > 1
the demand curve is elastic
If the |Ed| < 1
the demand curve is inelastic
if the [Ed] =1
the demand curve is unit elastic
The more responsive quantity demanded is to a change in price
the more elastic is the demand curve
When demand is elastic
the quantity effect dominates the price effect. So an increase in price will cause significant reduction in the quantity demanded.
If two linear demand (or supply) curves run through a common point...
then at any given quantity, the curve that is FLATTER is MORE ELASTIC.
