Economics
Elasticity of Demand
Elasticity of demand measures the responsiveness of quantity demanded to a change in price. If demand is elastic, a small change in price leads to a proportionally larger change in quantity demanded, and vice versa for inelastic demand. This concept is crucial for businesses and policymakers to understand how consumers will react to price changes.
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11 Key excerpts on "Elasticity of Demand"
eBook - PDF- Irvin Tucker(Author)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
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 • Price Elasticity of Demand 115 Key Concepts Price Elasticity of Demand Elastic demand Total revenue (TR) Inelastic demand Unitary elastic demand Perfectly elastic demand Perfectly inelastic demand Tax incidence Summary • Price Elasticity of Demand is a measure of the responsiveness of the quantity demanded to a change in price. Specifically, price Elasticity of Demand is the ratio of the percentage change in quantity demanded to the percentage change in price. E d uni003D.bold % u1D6AB P % u1D6AB Q uni003D.bold Q 2 2 Q 1 Q 1 uni002B.bold Q 2 P 2 2 P 1 P 1 uni002B.bold P 2 • Elastic demand occurs where there is a change of more than 1 percent in quantity demanded in response to a 1 percent change in price. Demand is elastic when the elasticity coefficient is greater than 1 and total revenue (price times quantity) varies inversely with the direction of the price change. P Q D • Inelastic demand occurs where there is a change of less than 1 percent in quantity demanded in response to a 1 percent change in price. Demand is inelastic when the elasticity coefficient is less than 1 and total revenue varies directly with the direction of the price change. P Q D • Unitary elastic demand occurs where there is a 1 percent change in quantity demanded in response to a 1 percent change in price. Demand is unitary elastic when the elasticity coefficient equals 1 and total revenue remains constant as the price changes. P Q D • Perfectly elastic demand occurs when the quantity demanded declines to zero for even the slightest rise or fall in price.
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 - 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/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.
eBook - PDFIntroduction to Economics
Social Issues and Economic Thinking
- Wendy A. Stock(Author)
- 2013(Publication Date)
- Wiley(Publisher)
SUMMARY In this chapter, we learned about the Elasticity of Demand, which measures how respon- sive consumers are to changes in the prices of goods and services. When changes in quantity demanded are relatively large in response to price changes, demand is elas- tic. When changes in quantity demanded are relatively small in response to price changes, demand is inelastic. Goods with few substitutes and goods that are neces- sities have relatively inelastic demand. Demand tends to be more elastic for goods when consumers have more time to adjust to price changes and when consumers spend larger fractions of their incomes on the goods. How total revenue responds to price changes is influenced by the Elasticity of Demand. When the demand for a good is inelastic, sellers can increase total revenue by increasing the price of the good. When demand is elastic, sellers can increase total revenue by decreasing the price of the good. KEY CONCEPTS • Elasticity • Price Elasticity of Demand • Elastic demand • Inelastic demand • Perfectly inelastic demand • Perfectly elastic demand • Unit elastic demand • Elasticity coefficient • Total revenue K e y C o n c e p t s 9 1 9 2 C H A P T E R 5 E l a s t i c i t y DISCUSSION QUESTIONS AND PROBLEMS 1. Suppose that the adoption fee at the animal shelter is initially $15.00 and the average number of animals adopted per week at that price is 100. In the face of ris- ing costs, there is an increase in the pet adoption fees at the animal shelter from $15.00 to $22.50 (a 50 percent price increase). Proponents of the increase argue that it is necessary to raise revenues for the shelter. Critics of the plan worry that the fee increase might decrease adoptions enough to actually lower shelter revenues. a. What is the revenue earned by the shelter for ani- mal adoptions before the fee increase? b. Suppose animal adoptions fall by 10 percent in response to the 50 percent fee increase (to 90 animals per week).
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(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. 104 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 Elasticities can be usefully divided 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 summarized in Table 5.1. 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 get into the nitty gritty of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity, instead of using simple percentage changes in quantity and price, economists use the average percent change in both quantity and price.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
This issue reaches beyond governments and taxes. Every firm faces a similar issue. When a firm considers raising the sales price, it must consider how much a price increase will reduce the quantity demanded of what it sells. Conversely, when a firm puts its products on sale, it must expect (or hope) that the lower price will lead to a significantly higher quantity demanded. 5.1 Price Elasticity of Demand and Price Elasticity of Supply LEARNING OBJECTIVES By the end of this section, you will be able to: • Calculate the price Elasticity of Demand • Calculate the price elasticity of supply Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. 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 112 5 • Elasticity Access for free at openstax.org 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. We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. Because price and quantity demanded move in opposite directions, price Elasticity of Demand is always a negative number. Therefore, price Elasticity of Demand is usually reported as its absolute value, without a negative sign. The summary in Table 5.1 is assuming absolute values for price Elasticity of Demand. 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.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
The value of the price Elasticity of Demand depends on: • The availability of substitutes . Demand for a commodity is more price elastic where there are close substitutes. • The extent to which the commodities may be characterized as luxuries or necessities . Luxury goods are more price elastic whereas necessities are more inelastic. • Time period . Demand is more price elastic in the long-run than in the short-run. • Alternative uses . The more alternative uses a commodity has, the greater the price Elasticity of Demand. C H A P T E R 3 61 MARKET DEMAND AND ELASTICITY C H A P T E R 3 • The proportion of total income spent on the product . The greater the proportion the higher the elasticity. Arc Elasticity of Demand The above measures of price Elasticity of Demand refer to what may be called the point Elasticity of Demand. This is appropriate for small changes in price. For larger changes in price, the formula for arc price Elasticity of Demand is used. This may be expressed (with the subscript x omitted) as: Q ( P 1 + P 2 ) / 2 η P = · P ( Q 1 + Q 2 ) / 2 3.2.2 The PCC and the price Elasticity of Demand Price Elasticity of Demand may be determined from the shape of the price consumption curve ( PCC ). As explained in Chapter 2, the price consumption curve is the line joining successive equilibrium points as the price of good x falls. The price Elasticity of Demand can be derived from the price consumption curve using money and one good ( x ). The relationship is as follows: • Where η P = 1 in absolute terms (unitary elastic demand), the PCC is a horizontal line. • Where η P < 1 in absolute terms (inelastic demand), the PCC is an upward sloping line. • Where η P > 1 in absolute terms (elastic demand), the PCC is a downward sloping line. Unitary elastic demand Figure 3.2 describes a consumer’s budget line AB and an equilibrium point R on indifference curve IC 1 . Focusing on good x , define good y as the money the consumer can spend on all other goods (except x ).
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
In a market economy, prices tell producers and consumers about the relative scarcity of resources and products. A downward-sloping demand curve and an upward-sloping supply curve form a powerful analytical tool. To use this tool wisely, you must learn more about these curves. The more you know, the better you can predict the effects of a change in the price on quantity. Decision mak- ers are willing to pay dearly for such knowledge. For example, Taco Bell would like to know what happens to sales if taco prices change. Governments would like to know how a hike in cigarette taxes affects teenage smoking. Colleges would like to know how tuition increases affect enroll- ments. And subway officials would like to know how fare changes affect ridership. To answer such questions, you must learn how responsive consumers and producers are to price changes. This chapter introduces the idea of elasticity, a measure of responsiveness. Topics discussed in this chapter include: 5-1 Price Elasticity of Demand Just before a recent Thanksgiving, Delta Airlines cut fares for some seats on more than 10,000 domestic flights. Was that a good idea? A firm’s success or failure often depends on how much it knows about the demand for its product. For Delta’s total revenue to increase, the gain in tickets sold would have to more than make up for the decline in ticket prices. Likewise, the operators of Taco Bell would like to know what happens to sales if the price drops from, say, $1.10 to $0.90 per taco. The law of demand tells us that a lower price increases quantity demanded, but by how much? How sensitive is quantity demanded to a change in price? After all, if quantity demanded increases enough, a price cut could be a profitable move for Taco Bell. 5-1a Calculating Price Elasticity of Demand Let’s get more specific about how sensitive changes in quantity demanded are to changes in price.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
In a market economy, prices tell producers and consumers about the relative scarcity of resources and products. A downward-sloping demand curve and an upward-sloping supply curve form a powerful analytical tool. To use this tool wisely, you must learn more about these curves. The more you know, the better you can predict the effects of a change in the price on quantity. Decision mak-ers are willing to pay dearly for such knowledge. For example, Taco Bell would like to know what happens to sales if taco prices change. Governments would like to know how a hike in cigarette taxes affects teenage smoking. Colleges would like to know how tuition increases affect enroll-ments. And subway officials would like to know how fare changes affect ridership. To answer such questions, you must learn how responsive consumers and producers are to price changes. This chapter introduces the idea of elasticity , a measure of responsiveness . Topics discussed in this chapter include: 5-1 Price Elasticity of Demand Just before a recent Thanksgiving, Delta Airlines cut fares for some seats on more than 10,000 domestic flights. Was that a good idea? A firm’s success or failure often depends on how much it knows about the demand for its product. For Delta’s total revenue to increase, the gain in tickets sold would have to more than make up for the decline in ticket prices. Likewise, the operators of Taco Bell would like to know what happens to sales if the price drops from, say, $1.10 to $0.90 per taco. The law of demand tells us that a lower price increases quantity demanded, but by how much? How sensitive is quantity demanded to a change in price? After all, if quantity demanded increases enough, a price cut could be a profitable move for Taco Bell. 5-1a Calculating Price Elasticity of Demand Let’s get more specific about how sensitive changes in quantity demanded are to changes in price.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 3 Price Elasticity of Demand PED is derived from the percentage change in quantity (%ΔQ d ) and percentage change in price (%ΔP). Price Elasticity of Demand ( PED or E d ) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic ) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic ) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or burden) of a tax on that good. ____________________ 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.
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