1 / 11

Elasticity of Demand

Elasticity of Demand. What is elasticity of demand?. Measure of how much quantity demanded respond to changes in price In other words: if the price of a product rises, the consumers will either buy less or the same amount of the product Willingness to buy.

tyanne
Télécharger la présentation

Elasticity of Demand

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Elasticity of Demand

  2. What is elasticity of demand? • Measure of how much quantity demanded respond to changes in price • In other words: if the price of a product rises, the consumers will either buy less or the same amount of the product • Willingness to buy

  3. What determines elasticity of demand? • Availability of substitutes • Necessities vs. luxuries • Definition of market • Time horizon

  4. Availability of Substitutes • Goods with close substitutes tend to have more elastic demand. • Ex) lemonade and orange juice are substitutes. If the price of lemonade goes up, people will buy more orange juice than lemonade ➔ elastic • Ex) there is no substitute for clocks. Even if price of clock rises, people wil continue to buy clocks ➔ inelastic

  5. Necessities Vs. Luxuries • Necessities tend to have inelastic demands, and luxuries tend to have elastic demands. • Ex) Water is a necessity. Despite the change of price of water, people will still purchase water ➔ inelastic • Ex) a diamond ring is a luxury good. If it is too expensive, people will not buy it ➔ elastic

  6. Definition of Market • Narrowly defined market tend to have elastic demands, and broadly defined market tend to have inelastic demands. • Ex) Car is a broad category. It is inelastic because there are no substitutes. • Ex) Specific brands of car, such as Hyundai and BMW, are narrow category. They are elastic because people will buy cheaper brand of cars.

  7. Time horizon • Longer time horizon tend to have more elastic demand than shorter time horizon. • Ex) When price of gasoline rises for a few months, people will still pay for it ➔ inelastic • Ex) If price of gasoline continues to rise for two years, people will start to use more public transportation or buy fuel-efficient cars ➔ elastic

  8. How to calculate price elasticity of demand? • Price elasticity of demand = % change in quantity demanded / % change in price. • Midpoint method: (Q1-Q2) / {(Q1+Q2)/2}(P1-P2) / {(P1+P2)/2} • Note: the final result of this formula will be a negative number. In this case, ignore the negative sign.

  9. Price Elasticity of Demand Curve

  10. Total Revenue

  11. Income elasticity of demand % change in QD% change in P Cross-price elasticity of demand % change in QD of good 1% change in P of good 2 Other Demand Elasticity

More Related