Business
Own Price Elasticity Of Demand
Own Price Elasticity of Demand measures the responsiveness of the quantity demanded of a good to a change in its price, specifically from the perspective of the seller. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A high own price elasticity indicates that a small change in price leads to a large change in quantity demanded, and vice versa.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Own Price Elasticity Of Demand"
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
He found that not only had ticket sales declined, but his revenue had fallen as well. Where had the manager gone wrong? 1. How much do buyers alter their purchases in response to a price change? 434 Chapter 20 Elasticity: Demand and Supply Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 20-1a The Definition of Price Elasticity Elasticity is the measure of the responsiveness of quantity demanded or quantity supplied to a change in price or some other important variable . By “responsiveness” we mean “how much quantity demanded or quantity supplied changes with respect to a change in one variable, everything else held constant.” We have measures of elasticity for both demand and supply. The price elasticity of demand is a measure of the magnitude by which consumers alter the quantity of some product that they purchase in response to a change in the price of that product. The price elasticity of demand, symbolized as e d , is the percentage change in the quan-tity demanded of a product divided by the percentage change in the price of that product. e d ¼ % D Q D % D P The more price-elastic demand is, the more responsive consumers are to a price change—that is, the more they will adjust their purchases of a product when the price of that product changes. Conversely, the less price-elastic demand is, the less responsive consumers are to a price change. Demand curves typically slope down. This means that price ( P ) and quantity ( Q D ) demanded move in opposite directions. Whenever P falls, Q D rises, and when P rises Q D falls.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
This is to distinguish the responsiveness of the quantity demanded of a good to its own price rather than to the price of another good (cross price elasticity). It may be defined as: proportionate change in Q x η P = proportionate change in P x Using this formula the price elasticity of demand for good x can be written as: d Q x / Q x η P = d P x / P x Re-writing: d Q x P x η P = · d P x Q x 60 THE PRICE ELASTICITY OF DEMAND 3.2 Price elasticity of demand may be identified as elastic, inelastic or unitary elastic depending on the value of η P as follows: • If η P > 1 in absolute terms, demand is said to be price elastic. • If η P < 1 in absolute terms, demand is said to be price inelastic. • If η P = 1 in absolute terms, demand is said to be unitary elastic. It should be noted that price elasticity of demand for normal goods carries a negative value. That is because of the negative relationship between price and quantity (i.e. as price goes up, quantity goes down). However, typically, the value for price elasticity ( η P ) is written without the negative sign as the negative sign is understood. Where computation is involved the negative sign must be used. Consequences of the value of price elasticity Where the demand for a commodity is price elastic ( η P > 1 in absolute terms), the percentage change in the quantity demanded is greater than the percentage change in price and in the opposite direction. The significance is that if price is reduced by a certain proportion (say 10 per cent), the quantity demanded is increased by a greater proportion (say 15 per cent). Thus a price reduction leads to increased consumer expenditure on the good and consequently increased revenue for the seller of the good. A price increase, on the other hand, leads to a reduction in revenue for the seller of the good.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 108 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we delve into the details of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 108 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we delve into the details of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 108 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col12190/1.4 We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we delve into the details of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Definition PED is a measure of responsiveness of the quantity of a good or service demanded to changes in its price. The formula for the coefficient of price elasticity of demand for a good is: The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the law of demand. For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are Veblen and Giffen goods. Because the PED is negative for the vast majority of goods and services, however, economists often refer to price elasticity of demand as a positive value (i.e., in absolute value terms). This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good. The latter type of elasticity measure is called a cross -price elasticity of demand. As the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above decreases for a combination of two reasons. First, the PED for a good is not necessarily constant; as explained below, PED can vary at different points along the demand curve, due to its percentage nature. Elasticity is not the same thing as the slope of the demand curve, which is dependent on the units used for both price and quantity.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
53 2.3 OTHER ELASTICITIES We can use elasticity to characterize the responsiveness of demand to any of the determinants of demand. Two of the more common elasticities in addition to the price elasticity of demand are the income elasticity of demand and the cross-price elasticity of demand. INCOME ELASTICITY OF DEMAND The income elasticity of demand is the ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determi- nants of demand constant: , 100% 100% Q Q Q I I I or, after rearranging terms, , Q I Q I I Q (2.5) Table 2.5 shows estimated income elasticities of demand for two different types of U.S. households: those whose incomes place them below the poverty line and those whose incomes place them above it. For both types of households, the estimated income elasticities of demand are positive, indicating that the quantity demanded of the good increases as income increases. However, it is also possible that income elasticity of demand can be negative. Some studies suggest that in economically advanced countries in Asia, such as Japan and Taiwan, the income elasticity of demand for rice is negative. 19 OTHER ELASTICITIES 2.3 income elasticity of demand The ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determinants of demand constant. Price Elasticity of Demand in a Local Gasoline Market Extending the methodology utilized in the study by Berry, Levinsohn, and Pakes described in Applica- tion 2.4, Jean-François Houde estimated demand func- tions for local gasoline stations in Quebec City, Canada using data from 1991 to 2001. 18 One of the novelties of Houde’s study is that it explicitly incorporated the spatial structure of demand—that is, the fact that for local retail ser- vices such as gasoline stations, a key determinant of demand is the location of sellers compared to the loca- tions and commuting patterns of consumers.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
5-3 Price Elasticity of Supply Prices signal both sides of the market about the relative scarcity of products. Higher prices discourage consumption but encourage production. Lower prices encourage con-sumption but discourage production. The price elasticity of demand measures how Product Short Run Long Run Cigarettes (among adults) — 0.4 Electricity (residential) 0.1 1.9 Air travel 0.1 2.4 Beer 0.3 — Medical care and hospitalization 0.3 0.9 Gasoline 0.4 1.5 Milk 0.4 — Fish (cod) 0.5 — Wine 0.7 1.2 Movies 0.9 3.7 Natural gas (residential) 1.4 2.1 Automobiles 1.9 2.2 Chevrolets — 4.0 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5 Elasticity of Demand and Supply 103 responsive consumers are to a price change. Likewise, the price elasticity of supply mea-sures how responsive producers are to a price change. Supply elasticity is calculated in the same way as demand elasticity. In simplest terms, the price elasticity of supply equals the percentage change in quantity supplied divided by the percentage change in price. Because a higher price usually increases quantity supplied, the percentage change in price and the percentage change in quantity supplied move in the same direction, so the price elasticity of supply is usually a positive number. Exhibit 7 depicts a typical upward-sloping supply curve. As you can see, if price increases from p to p 9 , quantity supplied increases from q to q 9 . Price and quantity supplied move in the same direction. Let’s look at the elasticity formula for the supply curve.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
5-3 Price Elasticity of Supply Prices signal both sides of the market about the relative scarcity of products. Higher prices discourage consumption but encourage production. Lower prices encourage con- sumption but discourage production. The price elasticity of demand measures how Product Short Run Long Run Cigarettes (among adults) — 0.4 Electricity (residential) 0.1 1.9 Air travel 0.1 2.4 Beer 0.3 — Medical care and hospitalization 0.3 0.9 Gasoline 0.4 1.5 Milk 0.4 — Fish (cod) 0.5 — Wine 0.7 1.2 Movies 0.9 3.7 Natural gas (residential) 1.4 2.1 Automobiles 1.9 2.2 Chevrolets — 4.0 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5 Elasticity of Demand and Supply 103 responsive consumers are to a price change. Likewise, the price elasticity of supply mea- sures how responsive producers are to a price change. Supply elasticity is calculated in the same way as demand elasticity. In simplest terms, the price elasticity of supply equals the percentage change in quantity supplied divided by the percentage change in price. Because a higher price usually increases quantity supplied, the percentage change in price and the percentage change in quantity supplied move in the same direction, so the price elasticity of supply is usually a positive number. Exhibit 7 depicts a typical upward-sloping supply curve. As you can see, if price increases from p to p9, quantity supplied increases from q to q9. Price and quantity supplied move in the same direction. Let’s look at the elasticity formula for the supply curve.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price. Income Elasticity of Demand The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. Income elasticity of demand = % change in quantity demanded % change in income For most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. This pattern is common enough that these goods are referred to as normal goods. However, for a few goods, an increase in income means that one might purchase less of the good; for example, those with a higher income might buy fewer hamburgers, because they are buying more steak instead, or those with a higher income might buy less cheap wine and more imported beer. When the income elasticity of demand is negative, the good is called an inferior good. The concepts of normal and inferior goods were introduced in Demand and Supply. A higher level of income for a normal good causes a demand curve to shift to the right for a normal good, which means that the income elasticity of demand is positive. How far the demand shifts depends on the income elasticity of demand. A higher income elasticity means a larger shift. However, for an inferior good, that is, when the income elasticity of demand is negative, a higher level of income would cause the demand curve for that good to shift to the left. Again, how much it shifts depends on how large the (negative) income elasticity is. Cross-Price Elasticity of Demand A change in the price of one good can shift the quantity demanded for another good.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
