Elasticity. Price elasticity of demand Measures the responsiveness to a change in price; that is, will the quantity demanded change if the price of the.

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Presentation transcript:

Elasticity

Price elasticity of demand Measures the responsiveness to a change in price; that is, will the quantity demanded change if the price of the product is changed? Formula: Percentage change in quantity demanded Percentage change in price

Elastic or inelastic? When you do your calculations, if your answer is: Between 0 and 1, your product is price inelastic: unresponsive to price change Equal to 1, your product is unit price elastic: a change in price results in a proportional change in demand Greater than 1, your product is price elastic: responsive to price change

Income elasticity of demand Measures the change in demand for a product if there is a change in consumers' income. Formula: Percentage change in quantity demanded Percentage change in income

Elastic or inelastic? Less than 0, inferior goods (demand falls as incomes rise) Between 0 and 1, normal goods: necessities Greater than 1, normal goods: luxury/superior goods (income elastic, very responsive to changes in income – demand rises as incomes rise)

Cross-elasticity of demand Measures the change in demand for one product if there is a change in the price of another product. Formula: Percentage change in quantity demanded for product A Percentage change in price of product B

Elastic or inelastic? Products that can replace each other (substitutes) will have a positive XED (demand for tea will increase if price of coffee goes up) Products that are linked (complements) have a negative XED (demand for DVDs will fall if DVD player price goes up) Goods with no relationship will have an ED of zero (price of jeans does not affect price of chocolate)

Advertising elasticity of demand Measures the change in demand in response to a change in advertising expenditure Formula: Percentage change in quantity demanded Percentage change in advertising expenditure

Elastic or inelastic? Less than 1, advertising inelastic (change in demand is less than the change in expenditure) Greater than 1, advertising elastic: (change in demand is more than the change in expenditure)