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Price Elasticity of Demand

Price Elasticity of Demand. Formula Interpretation Exercises. Objectives:. Define price elasticity of demand; Compute for the price elasticity of demand; interpret the price elasticity of demand. Price Elasticity of Demand.

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Price Elasticity of Demand

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  1. Price Elasticity of Demand Formula Interpretation Exercises

  2. Objectives: • Define price elasticity of demand; • Compute for the price elasticity of demand; • interpret the price elasticity of demand.

  3. Price Elasticity of Demand • Responsiveness of quantity demand as a result of a change in price

  4. price elasticity of demand Price elasticity of demand = % change in quantity demanded % change in price ED = % Q % P

  5. price elasticity of demand Q2 – Q1 ED = Q P2 – P1 P

  6. Where: • Q2 = new quantity demand • Q1 = initial quantity demand • P2 = new price • P1 = initial price • Q = ave. quantity demand • P = ave. price

  7. Rule: • If Ed = 1, Unitary greater than 1, elastic less than 1, inelastic

  8. Interpretation: • ELASTIC= luxury has close substitutes has many uses

  9. INELASTIC= necessity has no or few substitutes forms an insignificant part of the expenditures

  10. Example: • The price of burger increased from 25 to 30 pesos. The quantity demand dropped from 200 to 150. Is burger a necessity or a luxury?

  11. Solve for Ed and interpret the results. PRICE QUANTITY DEMAND • 10 20 12 10 2. 10 15 15 13

  12. Price Quantity Demand • 25 50 50 25 • 5 20 5 40 5. 5 20 10 20

  13. When the price of rice per kilo rose by 4 pesos from 25 pesos, the quantity demand decreased from 500 kilos to 475 kilos. Compute for Ed. Interpret the result.

  14. Remember Me… • As an entrepreneur, how would you price an elastic and an inelastic good? • Explain.

  15. Price Elasticity of Supply Formula Interpretation Exercises

  16. Objectives: • Define price elasticity of supply; • Compute for the price elasticity of supply; • interpret the price elasticity of supply.

  17. Price Elasticity of Supply • -responsiveness of quantity supply given a change in the price of the product.

  18. price elasticity of supply ES = % Qs % P ES = Q2 – Q1 Q P2 – P1 P

  19. RULE: • When Es > 1, elastic, manufactured good < 1, inelastic, agricultural good = 1, unitary elastic, semi-manufactured or semi-agricultural

  20. Exercises: Solve for Es and interpret the results. • P1= 20 ; Q1 = 100 P2= 25 ; Q2 = 150

  21. 2. When the fishermen learn that the price of tilapia increases from 80 pesos per kilo to 100 , they increase their harvest by 1,000 kilos only from 12,000.

  22. Remember Me… • Suppose you would like to engage in business, which would you opt to produce and sell, an elastic or an inelastic good? Why?

  23. Recap for the two lessons • What is the difference between price elasticity of demand and price elasticity of supply? • As a consumer, how useful is the principle of the price elasticity to you? • How about as an entrepreneur?

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