Price of the good Elasticity of Demand Income Price of other goods Price elasticity of demand Income...
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Transcript of Price of the good Elasticity of Demand Income Price of other goods Price elasticity of demand Income...
Priceof the good
Elasticity of Demand
Income
Priceof other goods
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Elasticity of Demand
What is price elasticity of demand?How to represent the different degrees
of elasticity of demand using graphs?What is cross elasticity of demand?What is income elasticity of demand?
Price elasticity of demand
The law of demand tells us that:
P Qd
But that’s not very useful to bizman.
More importantly:
the magnitude (extent) of the increase
Price elasticity of demand
Definition:
Responsiveness of quantity demanded to a change in the_________________, ceteris paribus.
Formula:
Price elasticity of demand (P)=
Price elasticity of demand
Compare the following cases:
a) 10% in price Qd increases by 30%
b) 10% in price Qd increases by only 2%
For case (a),• dd is sensitive to price changes• we say that the demand is __________• a given % Δ in price brings about a ________
% Δ in Qd
Price elasticity of demand
Compare the following cases:
a) 10% in price Qd increases by 30%
b) 10% in price Qd increases by only 2%
For case (b),• dd is unresponsive to price changes• we say that the demand is _________• a given % Δ in price brings about a _______
% Δ in Qd
Price elasticity of demand
Exercise:A theatre increases the price of its tickets from $5 to $10. As a result, its ticket sales falls from 500 tickets per week to 400 tickets per week.Is the demand for theatre tickets elastic or inelastic?
Price has increased from $5 to $10In % terms, price has increased by 100%
Qd has decreased from 500 tix to 400 tixIn % terms, Qd has decreased by 20%
Since % Δ in Qd < % Δ in price, dd is said to be ________
Price elasticity of demand
Formula:
Price elasticity of demand (P)= pricein %
Qdin %
Same Exercise:A theatre increases the price of its tickets from $5 to $10. As a result, its ticket sales falls from 500 tickets per week to 400 tickets per week.Find the value of the price elasticity of demand.
+ 100%
- 20%
P = - 0.2
Price elasticity of demand
Formula:
Price elasticity of demand (P)=pricein %
Qdin %
+ 100%
- 20%
P = - 0.2
P has a negative sign:_______________ between price of a good & Qd
P has a value of 0.2: for every 1% increase in price, Qd falls by only 0.2%.
Price elasticity of demand
Formula:
Price elasticity of demand (P) =pricein %
Qdin %
When demand is ________, • a given % Δ in price brings about a __________ proportionate % Δ in Qd• substituting into the formula above, the magnitude of P _____
Price elasticity of demand
Formula:
Price elasticity of demand (P) =pricein %
Qdin %
When demand is __________, • a given % Δ in price brings about a __________ proportionate % Δ in Qd• substituting into the formula above, the magnitude of P _____
Price elasticity of demand
Formula:
Price elasticity of demand (P)=pricein %
Qdin %
If a given change in price brings about a proportionate change in Qd, i.e. a 10% increase in price brings about a 10% reduction in Qd, demand is said to be _____________.
In this case, the magnitude of P is _____
Price elasticity of demand
Formula:
Price elasticity of demand (P) =pricein %
Qdin %
If price changes has _________ on Qd, demand is said to be ________________. (extremely insensitive)
In this case, the magnitude of P is _____
Price elasticity of demand
Formula:
Price elasticity of demand (P) = pricein %
Qdin %
If a small increase in price is enough to cause Qd to fall from its existing level _______, demand is said to be ______________. (extremely sensitive)
In this case, the magnitude of P is _____
Demand curves and P
Price
Qtydd
Price
Qty
dd
Price
Qtydd
Price
Qty
dd
Demand curves and P
Price
Qtydd
p = 1 (unit elastic)
p > 1 (elastic)
p < 1 (inelastic)
p =
p = 0
Demand curves and P
Price
Qty
dd
p = 0 (perfectly inelastic)
Quantity demanded remains fixed at Q regardless of price level
P0
P1
Q
Demand curves and P
Price
Qty
dd
p = (perfectly elastic)
The slightest increase in price is enough to cause Qd to fall from its existing level to zero.
P0
Q0
P1
0
Demand curves and P
Price
Qtydd
p = 1 (unit elastic)
A given % change in price will bring about the same % change in Qd
P0
P1
Q1 Q0
50%
50%
Q0
P0
Demand curves and P
Price
QtyD2 D1
A
Comparing the two dd curves D1 & D2.
Which has a more elastic dd at point A?
P1
Q2 Q1
C B
Q0
P0
Demand curves and P
Price
QtyD2 D1
A
P1
Q2 Q1
C B
For the same reduction in price,
dd curve _____ yields a greater increase in Qd
dd curve ____ is more elastic than dd curve _____
RECAP
Price elasticity of demand is defined as the _______________ of quantity demanded of a product to a change in ________, ceteris paribus.
The formula for calculating Ep is:
Ep almost always has a ______ sign because of _____________________________________
RECAP
Elastic demand• A given % Δ in P brings about _________
% Δ in Qd
• Magnitude of P is ____
Inelastic demand• % Δ in P brings about _________ % Δ in
Qd
• Magnitude of P is ______
Price
Qtydd
Price
Qty
dd
Price
Qtydd
Price
Qty
dd
RECAP
Perfectly inelastic dd
Ep = 0
Unitary elastic dd
Ep = 1
Perfectly elastic dd
Ep =
Ep falls as we move down the str line dd curve
Di De
Q0
P0
Price
Qty
A
P1
Q2 Q1
C B
Comparing the 2 dd curves below,
The steeper dd curve has a more ________ dd at point A
RECAP
Questions &
Answers
Ep and Revenue
$49.00 $129.50
Concept of Total Revenue
What is total revenue (TR)?The receipts from the sale of goods and services.
How to calculate TR? Fruit stall 50 Fuji apples a day at $1.50 each.What is the revenue earned by the stall holder?Total revenue = 50 $1.50 = $75Formula:
TotalRevenue
Concept of Total Revenue
Q
P
Price
Qty
D
Concept of Total Revenue
Suppose the firm lowers the selling priceWill it earn more or less revenue than before?
TR = P Q
The effect on TR depends on the relative magnitude of price & qty changes.This in turn depends on Ep.
?
Ep and Revenue
Question:
Why is it that Levis can sell its jeans at a much higher price and still remains profitable?
What does it tell you about the elasticity of dd for Levis jeans?
Ep and Revenue
Levis:• fashion icon• must-have
Still willing to buy despite the high price
Dd for Levis jeans is _________ in price _____ than proportionate in Qd Total revenue ______
TotalRevenue
Ep and Revenue
Q0
P0
Price
Qty
Inelastic dd
A
Q1
TotalRevenue
P1 B
Ep and Revenue
Giordano:• Appeals to the budget conscious
Attracted by low prices
Dd for Giordano jeans is _________ in price _____ than proportionate in Qd Total revenue ______
TotalRevenue
Ep and Revenue
Q0
P0
Price
Qty
Elastic dd
A
Q1
TotalRevenue
P1 B
Ep and Revenue
DD elasticity Price Qty Total Rev
Elastic
Inelastic
Unit Elastic
Ep
Elastic
Inelastic
depends on
Availability of substitutes
Share of budget
Degree of necessity
Definition of commodity
Time Frame
many
few
large
small
luxury
basic necessity
broad
specific
LR
SR
Factors affecting Ep
Priceof the good
Elasticity of Demand
Income
Priceof other goods
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Signs
Distinguish in terms of:
Definition
Determinants
Eab Ey
Distinguish between Ep, Eab and Ey
Ep
Magnitude
Price elasticity of demand
Definition:
Responsiveness of quantity demanded to a change in the price of the good, ceteris paribus.
Formula:
Price elasticity of demand (P)= pricein %
Qdin %
Income elasticity of demand
Definition:
Responsiveness of quantity demanded to a change in _______________, ceteris paribus.
Formula:
Income elasticity of demand (y)=
Cross elasticity of demand
Definition:
Responsiveness of quantity demanded to a change in ___________________, ceteris paribus.
Formula:
Cross elasticity of demand (AB)=
Price elasticity of demand
Sign:
price qty demanded
Ep has a negative sign to reflect this inverse relationship
Income elasticity of demand
Sign:
For most goods
income ____ demand
Ey has a ________ sign to reflect this _______ relationship for normal goods
Examples?
Income elasticity of demand
Sign:
For inferior goods
income _____ demand
Ey has a _________ sign to reflect this ________relationship for inferior goods
Examples ?
Cross elasticity of demand
Sign:
If goods A & B are substitutes (e.g. Pepsi & Coke)
price of good A ____ demand for good B
EAB has a _________ sign to reflect this ________ relationship for substitutes
Examples?
Cross elasticity of demand
Sign:
If goods A & B are complements (e.g. car & petrol)
price of good A ____ demand for good B
EAB has a __________ sign to reflect this _________ relationship for complements.
Examples?
Price elasticity of demand
Magnitude:
If a 10% Δ in P brings about a 15% Δ in Qd
dd is ____________ Ep has a magnitude of _____
If a 10% Δ in P brings about a 5% Δ in Qd
dd is _____________
Ep has a magnitude of _____
Income elasticity of demand
Magnitude:
If a 10% Δ in income brings about a 15% Δ in Qd
dd is ______________ Ey has a magnitude of _____
If a 10% Δ in income brings about a 5% Δ in Qd
dd is ________________
Ey has a magnitude of ____
Cross elasticity of demand
What is the significance of a large cross elasticity of demand?
Ey
Elastic
Inelastic
depends on
Nature of goods
Level of Y
luxury
basic necessity
low
high
Factors affecting Ey
many, close
few
not good complements
close
EAB
High
Low
depends on
ComplementsEAB < 0
SubstitutesEAB > 0
Factors affecting EAB
Elastic DD: Ep ____ Inelastic DD:Ep ___ Unitary DD: Ep=____
P TR
P TR
P TR
P TR
P TR
P TR
Activity Relationship of Ep and TR
Signs
Distinguish in terms of:
Definition
Determinants
Eab Ey
ActivityDistinguish between Ep, Eab and Ey
Ep
Magnitude