Chapter 11 Price Elasticity of Demand
Chapter 11 Price Elasticity of Demand
Chapter 11 Price Elasticity of Demand
Demand
Chapter 11
Elasticity . . .
(Q 2 Q1 )/[(Q 2 Q1 )/2]
Price Elasticity of Demand =
(P2 P1 )/[(P2 P1 )/2]
Computing the Price Elasticity
of Demand
(Q 2 Q1 )/[(Q 2 Q1 )/2]
Price Elasticity of Demand =
(P2 P1 )/[(P2 P1 )/2]
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones the your elasticity of demand, using the
midpoint formula, would be calculated as:
(10 8)
(10 8) / 2 22 percent
2.32
(2.20 2.00) 9.5 percent
(2.00 2.20) / 2
Ranges of Elasticity
Inelastic Demand
Percentage change in price is greater than
percentage change in quantity demand.
Price elasticity of demand is less than one.
Elastic Demand
Percentage change in quantity demand is
greater than percentage change in price.
Price elasticity of demand is greater than one.
Perfectly Inelastic Demand
- Elasticity equals 0
Price Demand
1. An $5
increase
in price... 4
100 Quantity
2. ...leaves the quantity demanded unchanged.
Inelastic Demand
- Elasticity is less than 1
Price
1. A 25% $5
increase
in price... 4
Demand
90 100 Quantity
2. ...leads to a 10% decrease in quantity.
Unit Elastic Demand
- Elasticity equals 1
Price
1. A 25% $5
increase
in price... 4
Demand
75 100 Quantity
2. ...leads to a 25% decrease in quantity.
Elastic Demand
- Elasticity is greater than 1
Price
1. A 25% $5
increase
in price... 4
Demand
50 100 Quantity
2. ...leads to a 50% decrease in quantity.
Perfectly Elastic Demand
- Elasticity equals infinity
Price
1. At any price
above $4, quantity
demanded is zero.
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
TR = P x Q
Elasticity and Total Revenue
Price
$4
P x Q = $400
P (total revenue)
Demand
0 100 Quantity
Q
The Total Revenue Test for
Elasticity
Increase in Decrease in
Total Revenue Total Revenue
Percentage Change
Income Elasticity = in Quantity Demanded
of Demand Percentage Change
in Income
Income Elasticity
- Types of Goods -
Normal Goods
Income Elasticity is positive.
Inferior Goods
Income Elasticity is negative.
Higher income raises the quantity demanded
for normal goods but lowers the quantity
demanded for inferior goods.
Cross Price Elasticity of
Demand
Elasticity measure that looks at the
impact a change in the price of one good
has on the demand of another good.
% change in demand Q1/% change in
price of Q2.
Positive-Substitutes
Negative-Complements.