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Price Elasticity of Demand Presented by: Sarah Christman.

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Presentation on theme: "Price Elasticity of Demand Presented by: Sarah Christman."— Presentation transcript:

1 Price Elasticity of Demand Presented by: Sarah Christman

2 The Elasticity Coefficient The coefficient of the price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price. The coefficient of the price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price. This number shows the consumers responsiveness or sensitivity to price changes. This number shows the consumers responsiveness or sensitivity to price changes.

3 Types of Elasticity Price Elastic: Elasticity coefficient greater than 1.0 Price Elastic: Elasticity coefficient greater than 1.0 Price Inelastic: Elasticity coefficient is less than 1.0 Price Inelastic: Elasticity coefficient is less than 1.0 Unit Elastic: Elasticity coefficient equal Unit Elastic: Elasticity coefficient equal to 1.0 to 1.0

4 Price Elasticity and Total Revenue Total Revenue= Price x Quantity Total Revenue= Price x Quantity If elasticity of demand is elastic, then a price decrease will increase TR If elasticity of demand is elastic, then a price decrease will increase TR If elasticity of demand is inelastic, then a price decrease will decrease TR If elasticity of demand is inelastic, then a price decrease will decrease TR If elasticity of demand is unit elastic, then changes in price will have no effect on TR If elasticity of demand is unit elastic, then changes in price will have no effect on TR

5 Determinants of Price Elasticity of Demand Price elasticity measures consumers sensitivity to changes in price. Price elasticity measures consumers sensitivity to changes in price. Demand is more elastic when: Demand is more elastic when: There are several substitutes available There are several substitutes available The larger the amount of their budget spent on the product The larger the amount of their budget spent on the product The more time consumers have to adjust to the price change. The more time consumers have to adjust to the price change.

6 Examples of Elasticity Newspapers.10 Newspapers.10 Eggs.32 Eggs.32 Gasoline.60 Gasoline.60 Movies.87 Movies.87 Beef 1.27 Beef 1.27 Residential Land 1.60 Residential Land 1.60 Milk.63 Milk.63 Shoes.91 Shoes.91

7 Applications of Price Elasticity Elasticity of Farm Products Elasticity of Farm Products Increase output tends to depress prices of farm products Increase output tends to depress prices of farm products Because demand is so inelastic, output is restricted in order to keep income stable for farmers. Because demand is so inelastic, output is restricted in order to keep income stable for farmers.

8 Applications of Elasticity Ctd Some argue that legalization of drugs will decrease drug trafficking by taking the profit out of it. Some argue that legalization of drugs will decrease drug trafficking by taking the profit out of it. Drugs that are cheaply produced, such as crack and heroin could be sold much cheaper if made legal. Drugs that are cheaply produced, such as crack and heroin could be sold much cheaper if made legal. Cost to addicts would decline, which would decrease street crime. Cost to addicts would decline, which would decrease street crime.

9 Applications of Elasticity Ctd Opponents of legalizing drugs say that elasticity of demand is much greater. Opponents of legalizing drugs say that elasticity of demand is much greater. For casual users may increase consumption at low prices, but if prices for illegal drugs are high they may substitute with alcohol. For casual users may increase consumption at low prices, but if prices for illegal drugs are high they may substitute with alcohol. Some economist predict that legalization of drugs would increase consumption by 60% Some economist predict that legalization of drugs would increase consumption by 60%


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