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Understanding Price Elasticity of Demand: Key Concepts and Determinants

This guide explores the concept of price elasticity of demand, which measures how the quantity demanded of a good responds to changes in its price. It covers the calculations for arc elasticity and point elasticity, including relevant formulas. Additionally, we discuss the determinants that affect price elasticity, such as the availability of substitute goods, the proportion of income spent on the good, consumer expectations, and the time period allowed for adjustment. Understanding these elements is crucial for managerial decision-making and revenue optimization.

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Understanding Price Elasticity of Demand: Key Concepts and Determinants

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  1. Managerial Economics Agung Nusantara E-mail: agnusantara@yahoo.com

  2. PRICE ELASTICITY OF DEMAND • Respons relatif jumlah barang X yang diminta terhadap perubahan harga barang X •  = (Qx/Qx) : (Px/Px)

  3. ARC ELASTICITY P/t A Pa B Pb Q/t Qa Qb • Qx Px • = --------------------- + ---------------------- (Qxb – Qxa)/2 (Pxb – Pxa)/2

  4. POINT ELASTICITY P/t • Qx/Qx • = ------------------- Px/Px A Pa Qa Q/t

  5. DETERMINANTS OF PRICE ELATICITY • Number of substitute goods • The greater proportion of spending on an item to consumers total income • Consumer expectations • The longer the time period allowed consumers to adjust their spending habits

  6. Relationship Between Price Elasticity - Total Revenue

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