ELASTICITY OF DEMAND PRICE ELASTICITY OF DEMAND CROSS ELASTICITY
OF DEMAND INCOME ELASTICITY OF DEMAND Slide 2 Price elasticity of
Demand Price increases always cause a decrease in quantity demanded
(law of demand). BUT For different products, the degree of
responsiveness varies from elastic (very responsive) to inelastic
(not very responsive). This responsiveness can be measured in a
number of ways Measures responsiveness of changes in quantity
demanded to changes in price. Slide 3 Total revenue method p pp q q
q AB C Consider products A, B and C. Price rises by the same amount
for each. Quantity demand falls for each - but by a different
amount. In A, total revenue (P*Q) has increased after the price
rise. In B, TR has remained the same and in C, TR has fallen. d d d
A is inelastic B is unitary C is elastic Slide 4 TOTAL REVENUE
METHOD IF PRICE AND TOTAL REVENUE MOVE IN THE SAME DIRECTION THEN
IF PRICE AND TOTAL REVENUE MOVE IN OPPOSITE DIRECTIONS THEN
INELASTIC DEMAND ELASTIC DEMAND DemandPrice IncreasePrice Decrease
ElasticTotal revenue will decrease Total revenue will increase
InelasticTotal revenue will increase Total revenue will decrease
Slide 5 ELASTICITY COEFFICIENT Percentage Change Method Ed = %Qd /
%P Use this method if you do not have both prices and both quantity
demands. Mid Point Method Ed = Qd Q1+Q2 P1+P2 P This method is more
accurate. Use it if you have both quantities and both prices. X
Slide 6 ELASTICITY AT A POINT P P Q Q X Y Z X Y Z To calculate
elasticity of demand at point X, measure the distance XY and divide
by the distance XZ. If the demand function is a curve you need to
draw a tangent line at the point on the curve. Slide 7 Elastic and
Inelastic Demand Curves Quantity Price($) Quantity Price($)
Relatively Inelastic Relatively Elastic Shows that a change in
price will result in a proportionately larger change in demand
Shows that a change in price will result in a proportionately small
change in demand Slide 8 SPECIAL CASES P P Q Q D D PERFECTLY
INELASTIC. A change in price brings about no response - no change
in quantity demand. PERFECTLY ELASTIC A change in price brings
about an infinite response in quantity demand. Ed=0 Ed= Slide 9 WHY
INELASTIC? A necessity - either real or reputed. No close
substitutes. A small % of income spent on it. Non-durable
Government regulation makes it a compulsory purchase. Slide 10 WHY
ELASTIC ? Many substitutes A luxury A high % of income spent on it.
Durable Slide 11 Workbooks page 19-20 Slide 12 CROSS ELASTICITY OF
DEMAND The sign of the coefficient (+ or -) is important. Ecross =
%Qa %Pb or What would the equation be for the midpoint method?
Measures the responsiveness of quantity demanded of one product to
changes in the price of another. Slide 13 Ecross Coefficient If
Ecross < -1 then it indicates that the two products are
complements. The lower the number the stronger the complementary
relationship. Slide 14 Ecross Coefficient If Ecross >1 it
indicates that the two products are substitutes. The higher the
number the closer the substitute relationship. Slide 15 Income
elasticity of demand E= %Qd %Y What would the equation be for the
midpoint method? Measures the responsiveness of a change in
quantity demanded to a change in income Slide 16 INFERIOR GOODS
Income inelastic Qd Income E < 0 Slide 17 NORMAL GOODS Qd income
E > 1 0 < E < 1 Income elastic Luxury goods Income
inelastic Necessity Slide 18 GIVE REASONS This person needs new
windscreen wipers before she gets her car registered. Comment on
the price elasticity. Give 4 reasons. Slide 19 EXPLAIN As a persons
income increases the % of their income that they spend on food
falls. True or false? Explain why. Slide 20 Vocabulary Measures
responsiveness of demand to changes in price of another good. A
good with negative income elasticity. Cross elasticity Inferior
goods Slide 21 Vocabulary Measures responsiveness of quantitydemand
to changes in price. Measures responsiveness of quantity demand to
changes in income Price elasticity Of demand Income elasticity Of
demand
