Economics
Price Elasticity of Demand
Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the value is greater than 1, demand is considered elastic, meaning quantity demanded is highly responsive to price changes. If the value is less than 1, demand is inelastic, indicating quantity demanded is less responsive to price changes.
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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 - 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)
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)
percentage change in the quantity demanded or supplied percentage change in the quantity demanded of a good or service divided the percentage change in price percentage change in the quantity supplied divided by the percentage change in price manner in which the tax burden is divided between buyers and sellers when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied the percentage change in hours worked divided by the percentage change in wages the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance Chapter 5 | Elasticity 127 KEY CONCEPTS AND SUMMARY 5.1 Price Elasticity of Demand and Price Elasticity of Supply Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. We compute it as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. We can describe elasticity as elastic (or very responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. 5.2 Polar Cases of Elasticity and Constant Elasticity Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all.
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.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
percentage change in the quantity demanded or supplied percentage change in the quantity demanded of a good or service divided the percentage change in price percentage change in the quantity supplied divided by the percentage change in price manner in which the tax burden is divided between buyers and sellers when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied the percentage change in hours worked divided by the percentage change in wages the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance KEY CONCEPTS AND SUMMARY 122 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 5.1 Price Elasticity of Demand and Price Elasticity of Supply Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. Elasticity can be described as elastic (or very responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. 5.2 Polar Cases of Elasticity and Constant Elasticity Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
You might think that when the price rises, so will the total revenue, but a higher price will generally reduce the quantity demanded. Thus, the “benefit” of the higher price is offset by the “cost” due to the reduction in quantity, and businesses must generally consider this trade-off when they think about raising a price. If the demand is elastic (the quantity demanded is relatively sensitive to price), the quantity reduction will outweigh the benefit of the higher price, and total revenue will fall. If the demand is inelastic (the quantity demanded is relatively insensitive to price), the quantity reduction will not be too severe, and total revenue will go up. Thus, knowledge of the Price Elasticity of Demand can help a business predict the revenue impact of a price increase. DETERMINANTS OF THE Price Elasticity of Demand Price elasticities of demand have been estimated for many products using statistical techniques. Table 2.1 presents estimates for a variety of food, liquor, and tobacco prod- ucts in the United States; Table 2.2 presents estimates of price elasticities of demand for food products in India, and Table 2.3 presents estimates for various modes of transportation. What determines these elasticities? Consider the estimated elasticity of −0.107 for cigarettes in Table 2.1, which indicates that a 10 percent increase in the total revenue Selling price times the quantity of product sold. L E A R N I N G - B Y- D O I N G E X E R C I S E 2 . 6 Elasticities along Special Demand Curves Problem (a) Suppose a constant elasticity demand curve is given by the formula Q P 200 1 2 . What is the Price Elasticity of Demand? (b) Suppose a linear demand curve is given by the for- mula Q = 400 − 10P. What is the Price Elasticity of Demand at P = 30? At P = 10? Solution (a) Since this is a constant elasticity demand curve, the Price Elasticity of Demand is equal to −1/2 everywhere along the demand curve.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
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. 94 Part 2 Introduction to the Market System be represented as Δ p and the change in quantity as Δ q . The formula for calculating the Price Elasticity of Demand E D between the two points is the percentage change in quan-tity demanded divided by the percentage change in price, or E D 5 Δ q 4 Δ p ( q 1 q 9 )/2 ( p 1 p 9 )/2 Again, the same elasticity results whether going from the higher price to the lower price or the other way around. This is sometimes called the midpoint formula , because the bases for computing percentages are midway between the two points on the curve. Elasticity expresses a relationship between two amounts: the percentage change in quantity demanded and the percentage change in price. Because the focus is on the per-centage change , we don’t need to be concerned with how output or price is measured. For example, suppose the good in question is apples. It makes no difference in the elasticity formula whether we measure apples in pounds, bushels, or even tons. All that matters is the percentage change in quantity demanded. Nor does it matter whether we measure price in U.S. dollars, Mexican pesos, Zambian kwacha, or Vietnamese dong. All that matters is the percentage change in price. Finally, the law of demand states that price and quantity demanded are inversely related, so the change in price and the change in quantity demanded move in opposite directions.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
percentage change in the quantity demanded or supplied percentage change in the quantity demanded of a good or service divided the percentage change in price percentage change in the quantity supplied divided by the percentage change in price manner in which the tax burden is divided between buyers and sellers when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied the percentage change in hours worked divided by the percentage change in wages the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance KEY CONCEPTS AND SUMMARY 122 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11626/1.10 5.1 Price Elasticity of Demand and Price Elasticity of Supply Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. Elasticity can be described as elastic (or very responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. 5.2 Polar Cases of Elasticity and Constant Elasticity Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
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. 94 Part 2 Introduction to the Market System be represented as Δp and the change in quantity as Δq. The formula for calculating the Price Elasticity of Demand E D between the two points is the percentage change in quan- tity demanded divided by the percentage change in price, or E D 5 Δq 4 Δp (q1q9)/2 (p1p9)/2 Again, the same elasticity results whether going from the higher price to the lower price or the other way around. This is sometimes called the midpoint formula, because the bases for computing percentages are midway between the two points on the curve. Elasticity expresses a relationship between two amounts: the percentage change in quantity demanded and the percentage change in price. Because the focus is on the per- centage change, we don’t need to be concerned with how output or price is measured. For example, suppose the good in question is apples. It makes no difference in the elasticity formula whether we measure apples in pounds, bushels, or even tons. All that matters is the percentage change in quantity demanded. Nor does it matter whether we measure price in U.S. dollars, Mexican pesos, Zambian kwacha, or Vietnamese dong. All that matters is the percentage change in price. Finally, the law of demand states that price and quantity demanded are inversely related, so the change in price and the change in quantity demanded move in opposite directions. In the elasticity formula, the numerator and the denominator have opposite signs, leaving the Price Elasticity of Demand with a negative sign.
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