Price Elasticity of Demand: Our Sensitivity or Response to Changes in Price

The Importance of Elasticity "If I lower the price of my product, how much more will I sell?" "If I raise the price, how much less will I sell?" "If we learn that a resource is becoming scarce, will people scramble to acquire it?"

Elasticity and Total Revenue Elasticity of Demand Introduction Video

Price Elasticity of Demand The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price. It measure the responsiveness of buyers to changes in the prices of goods and services. If buyers do not respond very much to price changes, it is inelastic, if they do respond, it is elastic.

PED = % Change in Quantity Demanded of X Measuring Elasticity Price elasticity of demand gives the percentage change in quantity demanded in response to a percentage change in price (holding constant all the other determinants of demand). - Ignore the Negative Signs. PED = % Change in Quantity Demanded of X ÷ % Change in Price of X

Elastic Demand If price elasticity is greater than 1, the product is elastic. This means that the resulting change in quantity demanded is greater than the percentage change in price. Restaurant meals are traditionally elastic. Price increases cause people to reduce their quantity demanded by a larger percentage than the percentage change in price.

Inelastic Demand If price elasticity is less than 1, the product is inelastic. This means that the resulting change in quantity demanded is lower than the percentage change in price. Gasoline is traditionally inelastic. Price increases cause people to reduce their quantity demanded by a smaller percentage than the percentage change in price.

Unit Elasticity In some cases the percentage change in price might be equal to the percentage change in quantity demanded. If PED is equal to 1, the product is referred to as Unit Elastic.

Extreme Cases of Elasticity Perfectly Inelastic ( PED = 0) Perfectly Elastic (PED = Infinity)

The Midpoint Formula Because elasticity changes for a product depending on where we select on the curve, we must utilize the midpoint formula. Introducing the Mid-Point Formula

Demand is More Elastic at a Higher Price and Less Elastic at a Lower Price.

Total Revenue & Elasticity Total Revenue is the amount of money received by a firm from the sale of its products. Total Revenue = Quantity x Price If Demand is Elastic, a decrease in price will increase total revenue, and vice versa. If Demand is Inelastic, a decrease in price will decrease total revenue, and vice versa.

Key Questions 2 & 4 (Page 153) Develop answers for both questions. It is always permissible to work together, as this would be expected in most business environments.