20 - 1 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price...

20 - 1

Price Elasticity of Demand

Price Elasticity and Total Revenue

Determinants of Price Elasticity of Demand

Elasticity of

Demand

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HOW MUCH MORE OR LESS?

DOES IT MATTER?to whom?

THE LAW OF DEMAND SAYS...

PRICE ELASTICITY OF DEMAND

Consumers will buy more when prices go down and less when prices go up

Price Elasticity Provides an Answer

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The percentage change in price

The percentage change in quantity

.01

.02

Elasticity is .5Q

P

P1

P2

Q1Q2

D

Measures Responsiveness to Price Changes


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The percentage change in price

The percentage change in quantity

Q

P

P1

P2

Q1Q2

D

Commonly Expressed as…


% P% Q d

Elasticity is .5

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Inelastic from 0 to 1Typical of necessities one must have

Typical of luxuries one wants

Elastic from 1 to

Unit elastic when exactly = 1Price change does not reduce total revenue

Price Elasticity is...PRICE ELASTICITY & TOTAL REVENUE

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Extreme CasesPRICE ELASTICITY OF DEMAND

Perfectly Inelastic Demand

Perfectly Elastic DemandP

0

P

0

D1

Ed = 0

D2

Ed =

Q

Q

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WHY ARE SOME THINGS MOREELASTIC THAN OTHERS?

•Substitutability•Proportion of Income

oLuxuries versus Necessities•Time

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Q

P

D

When prices are low,

TR

Quantity Demanded

PRICE ELASTICITY & TOTAL REVENUE

So is total revenue

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Q

P

D

Total revenue riseswith price to a

point... TR

Quantity Demanded


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Q

P

D


point...

then declines

TR

Quantity Demanded


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Q

P

D


point...

then declines

TR

Quantity Demanded


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Q

P

D


point...

then declines

TR

Quantity Demanded


Total Revenue Test

20 - 1 Price Elasticity of Demand Price Elasticity and Total Revenue Determinants of Price...

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