Elasticity of Demand Final

7/31/2019 Elasticity of Demand Final

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Elasticity of demand measures the responsivenessof change in quantity demanded of a goodbecause of change in prices or income.


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PRICE ELASTICITY OF DEMAND

CROSS ELASTICITY OF DEMAND

INCOME ELASTICITY OF DEMAND

ADVERTISING ELASTICITY OF DEMAND


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Price elasticity of demand (PED or Ed) is ameasure used in economics to show theresponsiveness, or elasticity, of the quantitydemanded of a good or service to a change inits price. More precisely, it gives thepercentage change in quantity demanded inresponse to a one percent change in price(holding constant all the other determinantsof demand, such as income). It was devisedby Alfred Marshall.


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Price elasticity of demand (PED or Ed) is ameasure used in economics to show theresponsiveness, or elasticity, of the quantitydemanded of a good or service to a change inits price. More precisely, it gives thepercentage change in quantity demanded inresponse to a one percent change in price(holding constant all the other determinants

of demand, such as income). It was devisedby Alfred Marshall.


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Veblen and Giffen goods have +ve PED

Revenue is maximised when price is set so

that the PED is exactly one. The PED of a good can also be used to predict

the incidence (or "burden") of a tax on thatgood.

Various research methods are used todetermine price elasticity, including testmarkets, analysis of historical sales dataand conjoint analysis.

PED can vary at different points along

the demand curve, due to its percentagenature.


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Availability of Close Substitute

Necessities

Luxuries

Definition of the Market

Time Horizon

Age


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Interpreting values of price

elasticity coefficients


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when the percentage change in quantitydemanded is less than the percentage change inprice (so that Ed > - 1)


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Price Gouging/Life and Death


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when the percentage change in quantitydemanded isgreater than the percentage changein price (so that Ed < - 1).


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when the percentage change in quantitydemanded is equal to the percentage change inprice (so that Ed = - 1)


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the cross elasticity of demand or cross-priceelasticity of demand measures the responsivenessof the demand for a good to a change in the priceof another good. It is measured as the percentage

change in demand for the first good that occurs inresponse to a percentage change in price of thesecond good

The formula used to calculate the coefficient crosselasticity of demand is


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10% increase in the price of fuel,

20% decrease in demand of fuel inefficient cars

Cross elasticity would be


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Increase in price of carbonated drinks

Increase in demand for non carbonated softdrinks


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Carbonateddrinks

Non-Carbonateddrinks

Suppose the price of Carbonated drinks rises from P1 to P2 because one of the inputs rises in price.This would cause people to consume less carbonated drinks , quantity decreases from Q1 to Q2. For

the substitute good Non carbonated drinks the demand curve shifts out for all price levels, from D toD , leading to more of the substitute good consumed.


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Thank you

References

http://www.wikipedia.org/

ttp://mrski-apecon-2008.wikispaces.com

http://www.tutor2u.net

http://www.mgmtmaterial.com

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Elasticity of Demand Final