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PRICE ELASTICITY OF DEMAND

If demand elasticity ;

<1 =1 >1

inelastic Unit elastic Elastic

EXAMPLES FOR ELASTIC ITEMS
Substitutes : different fruits (price of on fruit increases people go to another fruit, so demand drops significantly)

EXAMPLES FOR INELAST IC ITEMS
  Items in broad categories- (meat ) Complementary items

FACTORS THAT AFFECT DEMAND ELASTICITY
1. 2. 3. 4. Substitutes Time Definition of market Necessity vs luxuries

ELASTICITY RISES WHE N
1. 2. 3. Many available substitutes Longer time period Good is a luxury

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CALCULATING THE PRICE ELASTICITY OF DEMAND

( ( ( (

) ) ) )

EXAMPLE

• Example: – price of ice cream cones rises from \$2.00 to \$2.20 – amount bought falls from 10 to 8 – negative signs ignored.

STRAIGHT PERCENTAGE CHANGE EX.

(10  8)  100 20% 10  2 (2.20  2.00) 10%  100 2.00

Midpoint method Ex.

(10  8) 22% (10  8) / 2   2.32 (2.20  2.00) 9.5% (2.00  2.20) / 2

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Demand curve closer to be vertical = Price demand Inelastic Demand curve closer to be horizontal = Price demand is elastic

CROSS PRICE ELASTICITY OF DEMAND
Ex, what happens to the price of mangoes when price of banana increases

Normally cross price demand for substitutes are positive (when banana price increases mango price also increases) Cross price elasticity of demand for complements is negative (when price of petrol increase demand for cars decreases)

Inelastic price of demand = increase in price increases the revenue Elastic price of demand = Increasing the price decrease the revenue

TOTAL REVENUE
Total revenue is amount paid by buyers or amount received by sellers

TR = P(Price) X Q (quantity)

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INCOME ELASTICITY OF DEMAND

 

Income elastic goods: Sports cars , expensive foods Income inelastic: Food, fuel , clothing

THE ELASTICITY OF SUPPLY

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DETERMINANTS OF ELASTICITY OF SUPPLY

Ability for sellers to change the quantity they produce Inelastic supply : Beach front land Elastic supply : Books , cars

Time period : supply is elastic in the long run

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