Price Elasticity of Demand

Price Elasticity

Measures the relative responsiveness of the change in quantity demanded as a result of a change in the product’s price

PED = % ∆ quantity demanded% ∆ in price

Elastic Products

Very responsive to price change Usually luxury items (wants); Not

necessities (needs) Many substitutes for the product Consumers have a variety of choices Takes up large part of budget

Inelastic Products

Not very responsive to price change These are items of necessity that do

not have many substitutes Tend to be less expensive than

elastic goods.

Price Elastic or Inelastic?

PED = % ∆ quantity demanded% ∆ in price

If price elasticity is GREATER than 1, then it is classified as being price elastic.

>1= price elastic If price elasticity is LESS than 1, then it is

classified as being inelastic. < 1 = price inelastic

Example

If the price of a car wash increased 10 percent and the quantity demanded decreased 20 percent, the elasticity would be:

Price Elasticity = 20% = 2 10%

2 > 1, so the demand for a car wash is price elastic

Practice – calculate price elasticity and determine if these products are price elastic or inelastic

1. Quantity demanded of car stereo speakers increases 25% after a price drop of 50%.

2. Quantity demanded of motor oil increases 50% after a price drop of 25% .

3. Quantity demanded of car tires increases 10% when the price decreases 30%.

4. Quantity demanded of windshield wipers blades decreases 5% when the price increases 5%.

TOTAL REVENUE

Total Revenue (TR)=Price x Quantity Sold

Total Revenue and Elasticity

IF price and TR = Elastic Demand

If price and TR = Elastic Demand

If price and TR = Inelastic Demand

If price and TR = Inelastic Demand