1. Farid Abolhassani Elasticity of Demand 5

2. Learning Objectives After working through this chapter, you will be able to: Define price elasticity of demand (PED) Calculate PED over a portion of the demand curve Describe the relationship between PED and revenue Decide when an increase in price will increase revenue

3. Key Terms Cross-elasticity of demand: Cross-elasticity of demand: The percentage change in quantity demanded of the commodity divided by the percentage change in the price of another related commodity. Income elasticity of demand: Income elasticity of demand: The percentage change in quantity demanded of the commodity divided by the percentage change in population income. Price elastic: Price elastic: When quantity demanded is relatively responsive to price changes. When price elasticity of demand is greater than one. Price elasticity of demand: Price elasticity of demand: The relative responsiveness of the quantity demanded of a good to a change in its price. It is the percentage change in quantity demanded divided by the associated percentage change in price. Price elasticity of supply: Price elasticity of supply: The percentage change in quantity supplied of a commodity divided by the percentage change in the commodity’s price. Price inelastic: Price inelastic: When quantity demanded is relatively unresponsive to price changes. When price elasticity of demand is less than one.

4. How a Change in Supply Changes Price and Quantity

5. Price Elasticity of Demand units-free The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers’ plans remain the same.

6. Calculating Price Elasticity of Demand

7. Inelastic and Elastic Demand PID ID UED ED PED

8. Elasticity Along a Linear Demand Curve

9. Determinants of Elasticity along a Linear Demand Curve A B C Q P qpqp q - ∆q p + ∆p q + ∆q p - ∆p ∆q∆q ∆q∆q ∆p∆p ∆p∆p

10. Elasticity and Total Revenue Revenue

11. The Factors That Influence the Elasticity of Demand The closeness of substitutes: The closer the substitutes for a good or service, the more elastic is the demand for it The proportion of income spent on the good: The greater the proportion of income spent on a good, the more elastic is the demand for it The time elapsed since a price change: The longer the time that has elapsed since a price change, the more elastic is demand

12. Cross Elasticity of Demand substitute complement The cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same It is positive for a substitute and negative for a complement

13. Income Elasticity of Demand The income elasticity of demand is a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same

14. Classification of Goods from Income Elasticity Point of View Positive Greater than 1: Normal good, income elastic (international travel, jewellery) Less than 1: Normal good, Income inelastic (food, clothing, newspapers, and magazines) Negative: Inferior good (used clothes)