In this chapter you will learn: Discuss price elasticity of demand and how it can be applied, explain the usefulness of the total revenue test for price elasticity of demand, describe price elasticity of supply and how it can be applied, apply cross elasticity of demand and income elasticity of demand. | Elasticity 04 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity LO1 4- Price Elasticity of Demand Formula Formula for price elasticity of demand Ed = LO1 Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X 4- Price Elasticity of Demand Formula Use the midpoint formula Ensures consistent results Change in quantity Change in price Sum of quantities / 2 Sum of prices / 2 LO1 Ed = ÷ 4- Price Elasticity of Demand Formula Use percentages Unit free measure Compare responsiveness across products Eliminate the minus sign Easier to compare elasticities LO1 4- Interpretation of Elasticity of Demand Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity LO1 4- Price Elasticity of Demand Formula Formula for price elasticity of demand Ed = LO1 Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X 4- Price Elasticity of Demand Formula Use the midpoint formula Ensures consistent results Change in quantity Change in price Sum of quantities / 2 Sum of prices / 2 LO1 Ed = ÷ 4- Price Elasticity of Demand Formula Use percentages Unit free measure Compare responsiveness across products Eliminate the minus sign Easier to compare elasticities LO1 4- Interpretation of Elasticity of Demand Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed 4- Extreme Cases LO1 D1 P Perfectly inelastic demand Perfectly inelastic demand (Ed = 0) 0 4- Extreme Cases LO1 Perfectly elastic demand P D2 Perfectly elastic demand (Ed = ∞) 0 4- Total Revenue Test Total Revenue = Price x Quantity Inelastic demand P and TR move in the same direction Elastic demand P and TR move in opposite directions LO2 4- Summary of Price Elasticity of Demand LO2 Price Elasticity of Demand: A Summary Absolute Value of Elasticity Coefficient Demand Is Description Impact on Total Revenue of a: Price Increase Price Decrease Greater than 1 (Ed > 1) Elastic or relatively elastic Qd changes by a larger percentage than does price Total revenue decreases Total revenue increases Equal to 1 (Ed = 1) Unit or unitary elastic Qd changes by the same percentage as does price Total revenue is unchanged Total revenue is unchanged Less than 1 (Ed < 1) Inelastic or relatively inelastic Qd
