1. Chapter 5 Price Elasticity of Demand
Lecture Slides
Survey of Economics Irvin B. Tucker
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2. What will I learn in this chapter?
How to calculate price elasticity of demand and how this relates to total revenue (sales)
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3. What is price elasticity of demand?
The responsiveness, or sensitivity, to a change in price
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4. What is the definition of price elasticity of demand?
The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price
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5. How is the percent increase or decrease of two numbers calculated?
Percent change is the difference between the two numbers divided by the original number
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What is elastic demand?
A condition in which the percentage change in quantity demanded is greater than the percentage change in price
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7. Increase in total revenue Decrease in total revenue
Elastic Demand
Increase in total revenue
Decrease in total revenue
Price decrease
Price increase
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8. Why is the demand curve in the previous slide elastic?
See the price elasticity of demand calculation in the following slide:
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9. What is inelastic demand?
The percentage change in the quantity demanded is less than the percentage change in price
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10. Inelastic Demand Decrease in total revenue Increase in total revenue
Price increase
Price decrease
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11. What is a unitary elastic demand curve?
The percentage change in the quantity demanded is equal to the percentage change in price
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12. No change in total revenue
Unitary Elastic Demand
No change in total revenue
Price increase
Price decrease
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13. What is a perfectly elastic demand curve?
An extreme condition in which a small percentage change in price brings about an infinite percentage change in the quantity demanded
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14. Infinite change in quantity demanded
Perfectly Elastic Demand
Infinite change in quantity demanded
Price change
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15. What is a perfectly inelastic demand curve?
Another extreme condition in which the quantity demanded does not change as the price changes.
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16. Zero change in quantity demanded
Perfectly Inelastic Demand
Zero change in quantity demanded
Price change
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17. Why is the demand curve in the previous slide perfectly inelastic ?
Regardless of the percentage change in ticket price, buyers will purchase a quantity demanded of 20,000. Therefore, Ed =0.
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18. If a college raises tuition, what happens to total revenue?
If demand is elastic - total revenue decreases
If demand is unitary elastic – total revenue is constant
If demand is inelastic - total revenue increases
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If price increases and the revenue gained is less than the revenue lost, the demand curve is price elastic > 1
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If total revenue does not change when price increases, the demand curve is unitary elastic =1
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If price increases and the revenue gained is greater than the revenue lost, the demand curve is price inelastic < 1
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22. Does price elasticity of demand vary along a demand curve?
Yes. The price elasticity of demand coefficient of demand applies only to a specific range of prices along the demand curve.
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23. What factors influence demand sensitivity?
Availability of substitutes
Share of budget on the product
Adjustment to a price change over time
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24. What do substitutes have to do with a price change?
The more substitutes a product has, the more sensitive consumers are to a price change, and the more elastic the demand curve
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25. What conclusion can we make concerning substitutes?
The price elasticity of demand is directly related to the availability of good substitutes for a product
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26. What does the share of one’s budget have to do with a price change?
The larger the purchase is to one’s budget, the more sensitive consumers are to a price change, and the more elastic the demand curve
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27. What does time have to do with sensitivity?
The longer consumers have to adjust, the more sensitive they are to a price change, and the more elastic the demand curve
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28. What conclusion can we make?
In general, the price elasticity coefficient of demand is higher the longer a price change persists
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END
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