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Price of the good Elasticity of Demand Income Price of other goods Price elasticity of demand Income elasticity of demand Cross elasticity of demand.

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Presentation on theme: "Price of the good Elasticity of Demand Income Price of other goods Price elasticity of demand Income elasticity of demand Cross elasticity of demand."— Presentation transcript:

1 Price of the good Elasticity of Demand Income Price of other goods Price elasticity of demand Income elasticity of demand Cross elasticity of demand

2 Elasticity of Demand  What is price elasticity of demand?  How to represent the different degrees of elasticity of demand using graphs?  What is cross elasticity of demand?  What is income elasticity of demand?

3 Price elasticity of demand The law of demand tells us that:  P   Qd But that’s not very useful to bizman. More importantly: the magnitude (extent) of the increase

4 Price elasticity of demand Definition: Responsiveness of quantity demanded to a change in the_________________, ceteris paribus. Formula: Price elasticity of demand (  P )=

5 Price elasticity of demand Compare the following cases: a) 10%  in price  Qd increases by 30% b) 10%  in price  Qd increases by only 2% For case (a), dd is sensitive to price changes we say that the demand is __________ a given % Δ in price brings about a ________ % Δ in Qd

6 Price elasticity of demand Compare the following cases: a) 10%  in price  Qd increases by 30% b) 10%  in price  Qd increases by only 2% For case (b), dd is unresponsive to price changes we say that the demand is _________ a given % Δ in price brings about a _______ % Δ in Qd

7 Price elasticity of demand Exercise: A theatre increases the price of its tickets from $5 to $10. As a result, its ticket sales falls from 500 tickets per week to 400 tickets per week. Is the demand for theatre tickets elastic or inelastic? Price has increased from $5 to $10 In % terms, price has increased by 100% Qd has decreased from 500 tix to 400 tix In % terms, Qd has decreased by 20% Since % Δ in Qd < % Δ in price, dd is said to be ________

8 Price elasticity of demand Formula: Price elasticity of demand (  P )= Same Exercise: A theatre increases the price of its tickets from $5 to $10. As a result, its ticket sales falls from 500 tickets per week to 400 tickets per week. Find the value of the price elasticity of demand % - 20%  P = - 0.2

9 Price elasticity of demand Formula: Price elasticity of demand (  P )= + 100% - 20%  P =  P has a negative sign: _______________ between price of a good & Qd  P has a value of 0.2: for every 1% increase in price, Qd falls by only 0.2%.

10 Price elasticity of demand Formula: Price elasticity of demand (  P ) = When demand is ________, a given % Δ in price brings about a __________ proportionate % Δ in Qd substituting into the formula above, the magnitude of  P _____

11 Price elasticity of demand Formula: Price elasticity of demand (  P ) = When demand is __________, a given % Δ in price brings about a __________ proportionate % Δ in Qd substituting into the formula above, the magnitude of  P _____

12 Price elasticity of demand Formula: Price elasticity of demand (  P )= If a given change in price brings about a proportionate change in Qd, i.e. a 10% increase in price brings about a 10% reduction in Qd, demand is said to be _____________. In this case, the magnitude of  P is _____

13 Price elasticity of demand Formula: Price elasticity of demand (  P ) = If price changes has _________ on Qd, demand is said to be ________________. (extremely insensitive) In this case, the magnitude of  P is _____

14 Price elasticity of demand Formula: Price elasticity of demand (  P ) = If a small increase in price is enough to cause Qd to fall from its existing level _______, demand is said to be ______________. (extremely sensitive) In this case, the magnitude of  P is _____

15 Demand curves and  P Price Qty dd Price Qty dd Price Qty dd Price Qty dd

16 Demand curves and  P Price Qty dd  p = 1 (unit elastic)  p > 1 (elastic)  p < 1 (inelastic)  p =   p = 0

17 Demand curves and  P Price Qty dd  p = 0 (perfectly inelastic) Quantity demanded remains fixed at Q regardless of price level P0 P1 Q

18 Demand curves and  P Price Qty dd  p =  (perfectly elastic) The slightest increase in price is enough to cause Qd to fall from its existing level to zero. P0 Q0 P1 0

19 Demand curves and  P Price Qty dd  p = 1 (unit elastic) A given % change in price will bring about the same % change in Qd P0 P1 Q1 Q0 50%

20 Q0 P0 Demand curves and  P Price Qty D2 D1 A Comparing the two dd curves D1 & D2. Which has a more elastic dd at point A? P1 Q2Q1 CB

21 Q0 P0 Demand curves and  P Price Qty D2 D1 A P1 Q2Q1 CB For the same reduction in price, dd curve _____ yields a greater increase in Qd  dd curve ____ is more elastic than dd curve _____

22 RECAP Price elasticity of demand is defined as the _______________ of quantity demanded of a product to a change in ________, ceteris paribus. The formula for calculating Ep is: Ep almost always has a ______ sign because of _____________________________________

23 RECAP Elastic demand A given % Δ in P brings about _________ % Δ in Qd Magnitude of  P is ____ Inelastic demand % Δ in P brings about _________ % Δ in Qd Magnitude of  P is ______

24 Price Qty dd Price Qty dd Price Qty dd Price Qty dd RECAP Perfectly inelastic dd Ep = 0 Unitary elastic dd Ep = 1 Perfectly elastic dd Ep =  Ep falls as we move down the str line dd curve

25 Di De Q0 P0 Price Qty A P1 Q2Q1 CB Comparing the 2 dd curves below, The steeper dd curve has a more ________ dd at point A RECAP

26 Questions & Answers

27 Ep and Revenue $49.00$129.50

28 Concept of Total Revenue What is total revenue (TR)? The receipts from the sale of goods and services. How to calculate TR? Fruit stall 50 Fuji apples a day at $1.50 each. What is the revenue earned by the stall holder? Total revenue = 50  $1.50 = $75 Formula:

29 Total Revenue Concept of Total Revenue Q P Price Qty D

30 Concept of Total Revenue Suppose the firm lowers the selling price Will it earn more or less revenue than before? TR = P  Q The effect on TR depends on the relative magnitude of price & qty changes. This in turn depends on Ep.   ?

31 Ep and Revenue Question: Why is it that Levis can sell its jeans at a much higher price and still remains profitable? What does it tell you about the elasticity of dd for Levis jeans?

32 Ep and Revenue Levis: fashion icon must-have Still willing to buy despite the high price Dd for Levis jeans is _________  in price  _____ than proportionate  in Qd  Total revenue ______

33 Total Revenue Ep and Revenue Q0 P0 Price Qty Inelastic dd A Q1 Total Revenue P1 B

34 Ep and Revenue Giordano: Appeals to the budget conscious Attracted by low prices Dd for Giordano jeans is _________  in price  _____ than proportionate  in Qd  Total revenue ______

35 Total Revenue Ep and Revenue Q0 P0 Price Qty Elastic dd A Q1 Total Revenue P1 B

36 Ep and Revenue DD elasticityPriceQtyTotal Rev   Elastic    Inelastic  Unit Elastic

37 Ep Elastic Inelastic depends on Availability of substitutes Share of budget Degree of necessity Definition of commodity Time Frame many few large small luxury basic necessity broad specific LR SR Factors affecting Ep

38 Price of the good Elasticity of Demand Income Price of other goods Price elasticity of demand Income elasticity of demand Cross elasticity of demand

39 Signs Distinguish in terms of: Definition Determinants EabEy Distinguish between Ep, Eab and Ey Ep Magnitude

40 Price elasticity of demand Definition: Responsiveness of quantity demanded to a change in the price of the good, ceteris paribus. Formula: Price elasticity of demand (  P )=

41 Income elasticity of demand Definition: Responsiveness of quantity demanded to a change in _______________, ceteris paribus. Formula: Income elasticity of demand (  y )=

42 Cross elasticity of demand Definition: Responsiveness of quantity demanded to a change in ___________________, ceteris paribus. Formula: Cross elasticity of demand (  AB )=

43 Price elasticity of demand Sign:  price   qty demanded Ep has a negative sign to reflect this inverse relationship

44 Income elasticity of demand Sign: For most goods  income  ____ demand Ey has a ________ sign to reflect this _______ relationship for normal goods Examples?

45 Income elasticity of demand Sign: For inferior goods  income  _____ demand Ey has a _________ sign to reflect this ________relationship for inferior goods Examples ?

46 Cross elasticity of demand Sign: If goods A & B are substitutes (e.g. Pepsi & Coke)  price of good A  ____ demand for good B E AB has a _________ sign to reflect this ________ relationship for substitutes Examples?

47 Cross elasticity of demand Sign: If goods A & B are complements (e.g. car & petrol)  price of good A  ____ demand for good B E AB has a __________ sign to reflect this _________ relationship for complements. Examples?

48 Price elasticity of demand Magnitude: If a 10% Δ in P brings about a 15% Δ in Qd  dd is ____________  Ep has a magnitude of _____ If a 10% Δ in P brings about a 5% Δ in Qd  dd is _____________  Ep has a magnitude of _____

49 Income elasticity of demand Magnitude: If a 10% Δ in income brings about a 15% Δ in Qd  dd is ______________  Ey has a magnitude of _____ If a 10% Δ in income brings about a 5% Δ in Qd  dd is ________________  Ey has a magnitude of ____

50 Cross elasticity of demand What is the significance of a large cross elasticity of demand?

51 Ey Elastic Inelastic depends on Nature of goods Level of Y luxury basic necessity low high Factors affecting E y

52 many, close few not good complements close E AB High Low depends on Complements E AB < 0 Substitutes E AB > 0 Factors affecting E AB

53 Elastic DD: Ep ____Inelastic DD:Ep ___Unitary DD: Ep=____ PTR P P P P P Activity Relationship of Ep and TR

54 Signs Distinguish in terms of: Definition Determinants EabEy Activity Distinguish between Ep, Eab and Ey Ep Magnitude


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