Chapter 6 - Elasticity. Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in this chapter. The text discusses the major determinants of price elasticity. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross- and income elasticities of demand and price elasticity of supply are also examined. The Last Word is about how firms use price elasticities to set their price. | Chapter 6 Elasticity Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in this chapter. The text discusses the major determinants of price elasticity. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross- and income elasticities of demand and price elasticity of supply are also examined. The Last Word is about how firms use price elasticities to set their price. 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 The law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), | Chapter 6 Elasticity Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in this chapter. The text discusses the major determinants of price elasticity. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Cross- and income elasticities of demand and price elasticity of supply are also examined. The Last Word is about how firms use price elasticities to set their price. 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 The law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand. If demand is elastic, there is a large change in quantity demanded even when price changes by a small amount. When demand is inelastic, there is a very small change in quantity demanded even when there is a large change in price. Ed = Price Elasticity of Demand Formula Formula for price elasticity of demand percentage change in quantity demanded of product X percentage change in price of product X LO1 Quantitative measure of elasticity, Ed = percentage change in quantity/ percentage change in price. Price Elasticity of Demand Formula Use the midpoint formula Ensures consistent results Ed = ÷ Change in quantity Sum of quantities/2 Change in price Sum of prices/2 LO1 Using traditional calculations, the measured elasticity over a given range of prices is sensitive to whether one starts at the higher price .
