Transcript Price elasticity of demand powerpoint notes

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
Elastic Products
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

Inelastic Products
Not very responsive to price change
 These are items of necessity that do not
have many substitutes
 Tend to be less expensive than elastic
goods.

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
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
Practice – calculate price elasticity and
determine if these products are price elastic
or inelastic
1.
2.
3.
4.
Quantity demanded of car stereo speakers
increases 25% after a price drop of 50%.
Quantity demanded of motor oil increases
50% after a price drop of 25% .
Quantity demanded of car tires increases
10% when the price decreases 30%.
Quantity demanded of windshield wipers
blades decreases 5% when the price
increases 5%.
TOTAL REVENUE
Total Revenue (TR)=
Price x Quantity Sold
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