Price elasticity of demand
- elastic in the top left - unit elastic in the middle - inelastic in the bottom right
how does elasticity vary down the demand curve ?
an increase in revenue
revenue: if demand is price elastic, a fall in price will lead to what change in revenue ?
a fall in revenue
revenue: if demand is price inelastic, a fall in price leads to what change in revenue ?
it does not change
revenue: if demand is unitary elastic, what happens to revenue when price changes ?
decrease the price
revenue: to increase revenue when demand is price elastic, what should a firm do ?
increase the price
revenue: to increase revenue when demand is price inelastic, what should a firm do ?
value = greater than 1 the percentage change in the quantity demanded is greater than the percentage change in price
what is elastic demand ?
value = less than 1 the % change in qty demanded is less than the % change in price
what is inelastic demand ?
value = 0 there is no change in the quantity demanded following a change in price
what is perfectly inelastic demand ?
positive if price rises quantity demanded rises upward sloping demand curve
what is price elasticity of giffen goods ?
negative if price rises qty demanded falls downward sloping demand curve
what is the price elasticity of inferior goods ?
negative If price rises qty demanded falls downward sloping curve
what is the price elasticity of normal goods ?
value = 1 the % change in qty demanded is equal to the % change in price
what is unit elastic demand ?
all the price and qty combinations give the same total revenue
with unit elasticity, what is total revenue like ?
value = infinity the percentage change in the quantity demanded is infinite
What is perfectly elastic demand ?
where the % change in qty demanded following a price change is infinite (horizontal demand curve)
define perfectly elastic demand
where the % change in qty demanded following a change in price is 0 (vertical demand curve)
define perfectly inelastic demand
measures the sensitivity of demand to a change in price
define price elasticity of demand
where the % change in quantity demanded is equal to the % change in price
define unit elastic demand
- if consumers spend a small % they will be less sensitive to price changes (inelastic) - if consumers spend a large % of income they are likely to look around for the best price so will be more elastic
explain how the % of income spent on the good influences elasticity
- if there are many subs available, consumers can easily switch away if the firm increases its price. Demand will be more elastic
explain how the number and availability of subs influences elasticity
- in the short-run it may not be easy to find alternatives and so demand is likely to be price inelastic - over time consumers can shop around and search for more subs and so demand Is likely to be more elastic
explain how the time horizon influences elasticity
- some goods which are habit forming are price inelastic
explain how the type of good influences elasticity
- the wider the category of goods and services, the more inelastic demand is e.g. consumers can easily switch from one brand to another, whereas consumers are less likely to give up the product all together when we look at all brands
explain how the width of the definition influences elasticity
1. the number and availability of substitutes 2. the time horizon 3. the percentage of income spent on the good 4. the type of good 5. the width of the definition
the size of the price elasticity of demand depends on what factors ? (5)
