More on consumer demand Mohammed 30600461 BAS

Elasticity Elasticity: is a measure of responsiveness of one variable to another Responsiveness: is the best measured by proportional or percentage changes Example: CD's price goes up by 10%  you decide no more CD's

Elasticity of demand It is the proportional change in quantity demanded relative to the proportional change in price. Ed = proportional change in quantity demanded / the proportional change in price. Ed = percentage changes in quantity demanded / percentage changes in price.

This information about elasticity is important to firms in their pricing decisions. To economists it is also important in their study of the economy.

Tow things to not: 1-Elasticity of demand is talked about as if it positive. 2-Elasticity measures percentage not absolute.

Low of demand Price and quantity demanded are inversely related and vice versa. Example: if a good price goes up the number of people which willing to buy it will decline.

Elasticity is independent of unit Because it use percentage not absolute. Percentage allow us to have a measure of responsiveness of different goods easier. Examples: 1- 2000$ PC increase 1$ 1decrease in quantity. 2- 1$ Pen increase 1$  1decrease in quantity. Would be the total revenue the same for both?

Elastic, Inelastic and Unit elastic 1-Elastic E>1 Proportional change in quantity > Proportional change in price. 2-Inelastic E<1 Proportional change in quantity < Proportional change in price. 3-Unit elastic E=1 Proportional change in quantity = Proportional change in price.

Examples 1-If brand A pen & brand B pen in the market and they have the same properties Brand B increase it price people will shift to brand A. (high elastic ) 2-If Windows increase it price (high inelastic)

Substitute Is the replacement of one brand with another that has the same basic properties or it can run like it.

Tow Special Elasticity Cases 1- 2- Perfectly inelastic Perfectly elastic price D price D quantity quantity Big change in quantity if their is enormous proportional price change No change in quantity if their is enormous proportional price change

substitution If there are more substitutions the goods are more elastic. 4 factors lead to substitution: 1-the longer the good run (more elastic) 2-the less necessity (more elastic) 3-the less information (more inelastic) 4-the expenditure for a good relative (more inelastic)

Total revenue Total revenue= total quantity sold X price of good. Knowing elasticity of demand is useful because from it they can tell whether the revenue goes up or down. So, elasticity tell what happen.

The relationship between elasticity and total revenue price A P Q quantity Total revenue is the area PAQ0

How total revenue change? The price will start from 0 demand inelastic. When the price increase the quantity of demand decrease but total revenue increase. Until the price rich a point the demand will be 0 then the total revenue will be 0. Example :shams newspaper.

Income elasticity of demand The percentage change in demand by the percentage change in income. Some goods consumption increase with the increase of the income like: 1-luxuries 2-necessities We call it normal good. Others decreases when the income increase it call inferior goods

Cross-Price Elasticity of Demand If we have to goods related (complement) If the price of one of them goes up the demand for both will decline. Exy= %change in demand for X / %change in price of a related good Y