Post on 17-May-2015
PRICE ELASTICITY OF PRICE ELASTICITY OF DEMANDDEMAND
MR. REY BELEN
DemandDemand
Price and Quantity Demanded are inversely related to each other.
An increase in price causes the quantity demanded to fall, all other things being equal.
Have you ever observed that Have you ever observed that there are goods, the quantity there are goods, the quantity demanded for which does not demanded for which does not drop even if their price have drop even if their price have
increased?increased?
Price Elasticity of DemandPrice Elasticity of Demand
A measure of the proportional change in units purchased (or those consumers are still willing to buy) when price changes.
It measures the responsiveness of quantity demanded to a change in price.
The coefficient of price elasticity The coefficient of price elasticity of demand is defined as:of demand is defined as:
It must be noted that such calculations always yield negative numbers because if price is increased, the demand for quantity falls an vice versa. To simplify things, the economists use the “absolute value” of price elasticity, eliminating the need to deal with negative numbers
The percentage change in quantity demanded divided by the percentage change in price
𝐸𝐷 = %∆𝑄%∆𝑃
𝐸𝐷 = 𝑄2 − 𝑄1𝑄𝑃2 − 𝑃1𝑃
WHERE:∆Q = Q2 – Q1 %∆Q = Q2 – Q1
QQ = Q2 + Q1
2
∆P = Q2 – Q1
%∆P = Q2 – Q1 Q
P = Q2 + Q1 2
RANGES OF ELASTICITY: DemandRANGES OF ELASTICITY: Demand
Elastic DemandElastic Demand
A given percentage change in price results in a larger percentage change in quantity demanded.
A decrease in price from P1 to P2 causes a more than proportionate increase in quantity demanded from Q1 to Q2.
Figure 1. Elastic Demand CurveFigure 1. Elastic Demand Curve
PRICE
P1
P2
0Q1 Q2
D
QUANTITY
A given percentage change in price results in a larger percentage change in quantity demanded.
A decrease in price from P1 to P2 causes a more than proportionate increase in quantity demanded from Q1 to Q2.
Inelastic DemandInelastic Demand
A given percentage change in price results in a smaller percentage change in quantity demanded.
A decrease in price from P1 to P2 causes a less than proportionate increase in quantity demanded from Q1 to Q2.
Figure 2. Inelastic Demand CurveFigure 2. Inelastic Demand Curve
PRICE
P1
P2
0Q1 Q2
D
QUANTITY
Unitary DemandUnitary Demand
A given percentage change in price results in an equal percentage change in quantity demanded.
A decrease in price from P1 to P2 causes a proportionate increase in quantity demanded from Q1 to Q2.
Figure 3. Unitary Demand CurveFigure 3. Unitary Demand Curve
PRICE
P1
P2
0Q1 Q2
D
QUANTITY
Perfectly Elastic DemandPerfectly Elastic Demand
Even without a change in price, there is an infinitely large percentage change in quantity demanded.
Consumers will be willing to buy any quantity at a given price
Figure 4. Perfectly Elastic Demand Figure 4. Perfectly Elastic Demand CurveCurve
PRICE
P1
0
D
QUANTITY
Perfectly Inelastic DemandPerfectly Inelastic Demand
A given percentage change in price results in no change in quantity demanded.
A change in price from P1 to P2 causes no change in quantity demanded.
Figure 5. Perfectly Inelastic Figure 5. Perfectly Inelastic Demand CurveDemand Curve
PRICE
P1
P2
0
D
QUANTITY
Goods with Price Elastic DemandGoods with Price Elastic Demand
Those which have numerous close substitutes.
Those which are considered as “luxuries”.Those which have more uses.
Goods with Price Inelastic DemandGoods with Price Inelastic Demand
Those people consider as “necessities“.Those which have no substitutes.Those on which an insignificant part of
income is spent.
Let us find out mathematically Let us find out mathematically whether a commodity is elastic or whether a commodity is elastic or inelasticinelastic
Guide: If the elasticity coefficient (which is presented as an absolute value) is greater than 1, demand is elastic; if it is less than 1, it is inelastic; if it is equivalent to 1, it is unitary.
Problem #1Problem #1
Let us suppose that the price of a certain commodity is P10.00 and its corresponding quantity demanded is 200 units. For some reasons, the price per unit increased to P14.00. As a result, quantity demanded declined to only 80 units. Find the percentage change in quantity demanded for every percentage change in quantity.
Given variables?Given variables?
Q1 = 200 unitsP1 = P10.00Q2 = 80 unitsP2 = P14.00∆Q = ? ; ∆P = ?%∆Q = ? ;%∆P = ?Q = ? ; P = ?
EEDD = 2.572 - ELASTIC = 2.572 - ELASTIC
It means that for every percentage change in price, percentage change in demand will be 2.574%.
The percentage change in the quantity demanded is greater than that of the price.
We may conclude that in our example, the product is either a “luxury” or that it has a lot of close substitutes or has numerous uses.
Problem #2Problem #2
A certain commodity which is priced at P3.00 has a corresponding demand of 60 units. If for some reasons, the price doubled and became P6.00 and the quantity demanded decreased to 48 units, what would be the price elasticity of demand?
EEDD = .333 - INELASTIC = .333 - INELASTIC
It means that for every percentage change in price, percentage change in demand will be .333%.
The percentage change in the quantity demanded is lesser than that of the price.
We may conclude that in our example, the product is either a “necessity” or that it has a no substitutes or those on which an insignificant part of income is spent.