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Lecture Managerial economics (9th edition): Chapter 6 – Thomas, Maurice

Chapter 6 - Elasticity and demand. In this chapter, you will learn to: Explain how price elasticity of demand (E) is used to measure the responsiveness or sensitivity of consumers to a change in the price of a good, explain the role that price elasticity plays in determining how a change in the price of a commodity affects the total revenue (TR = P × Q) received, list and explain several factors that affect the elasticity of demand,. | Chapter 6 Elasticity and Demand P & Q are inversely related by the law of demand so E is always negative The larger the absolute value of E, the more sensitive buyers are to a change in price Price Elasticity of Demand (E) • Measures responsiveness or sensitivity of consumers to changes in the price of a good 6- Price Elasticity of Demand (E) Elasticity Responsiveness E Elastic Unitary Elastic Inelastic Table 6.1 6- Price Elasticity of Demand (E) Percentage change in quantity demanded can be predicted for a given percentage change in price as: % Qd = % P x E Percentage change in price required for a given change in quantity demanded can be predicted as: % P = % Qd ÷ E 6- Price Elasticity & Total Revenue Elastic Quantity-effect dominates Unitary elastic No dominant effect Inelastic Price-effect dominates Price rises Price falls TR falls TR rises No change in TR No change in TR TR rises TR falls Table 6.2 6- Factors Affecting Price Elasticity of Demand Availability of | Chapter 6 Elasticity and Demand P & Q are inversely related by the law of demand so E is always negative The larger the absolute value of E, the more sensitive buyers are to a change in price Price Elasticity of Demand (E) • Measures responsiveness or sensitivity of consumers to changes in the price of a good 6- Price Elasticity of Demand (E) Elasticity Responsiveness E Elastic Unitary Elastic Inelastic Table 6.1 6- Price Elasticity of Demand (E) Percentage change in quantity demanded can be predicted for a given percentage change in price as: % Qd = % P x E Percentage change in price required for a given change in quantity demanded can be predicted as: % P = % Qd ÷ E 6- Price Elasticity & Total Revenue Elastic Quantity-effect dominates Unitary elastic No dominant effect Inelastic Price-effect dominates Price rises Price falls TR falls TR rises No change in TR No change in TR TR rises TR falls Table 6.2 6- Factors Affecting Price Elasticity of Demand Availability of substitutes The better & more numerous the substitutes for a good, the more elastic is demand Percentage of consumer’s budget The greater the percentage of the consumer’s budget spent on the good, the more elastic is demand Time period of adjustment The longer the time period consumers have to adjust to price changes, the more elastic is demand 6- Calculating Price Elasticity of Demand Price elasticity can be calculated by multiplying the slope of demand ( Q/ P) times the ratio of price to quantity (P/Q) 6- Calculating Price Elasticity of Demand Price elasticity can be measured at an interval (or arc) along demand, or at a specific point on the demand curve If the price change is relatively small, a point calculation is suitable If the price change spans a sizable arc along the demand curve, the interval calculation provides a better measure 6- Computation of Elasticity Over an Interval When calculating price elasticity of demand over an interval of demand, use the interval