Farid Abolhassani Elasticity of Demand 5. Learning Objectives After working through this chapter, you will be able to: Define price elasticity of demand.

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Farid Abolhassani Elasticity of Demand 5

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

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.

How a Change in Supply Changes Price and Quantity

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.

Calculating Price Elasticity of Demand

Inelastic and Elastic Demand PID ID UED ED PED

Elasticity Along a Linear Demand Curve

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

Elasticity and Total Revenue Revenue

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

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

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

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)