Price Elasticity

Price Elasticity of Demand

- Measures how responsive consumers are to price change

- Elasticity  another word for responsiveness

How is Elasticity used?

- Businesses: Determine the effects a change in price may

have on revenue.

- Entrepreneurs: Determine if a market is worth entering or if a

product is worth selling
What are Elastic goods?
- Goods that are not considered as a necessity or for which
substitutes are readily available.

Examples of Elastic Goods

Soft drinks Cereals Clothing Watches

- When there’s a price increase in these goods, people would

stop buying them or look for other brands since there’s a
massive number of options.
What are Inelastic goods?
- Goods that are considered as a necessity or for which
substitutes are NOT readily available.

Examples of Inelastic Goods

Life-saving meds Electricity Petrol Salt

- They are a necessity rather than luxury.

- There is no substitute for these goods. So people would still
continue to buy them despite the price increase.
 Availability of Substitutes

Availability of substitutes Product price elasticity of demand

Fewer substitutes, the less elastic the demand.

 Elasticity & Total Revenue

Total Revenue = p x q

Price
Qty demanded at
that price

- Lower price  producers get less for each unit sold  revenue

- Lower price  quantity demanded revenue

- Overall impact of lower price on total revenue depends on the net

result of these opposite effects.
Proportion of Consumer’s Budget

- Spending on some goods represents a large share of the

consumer’s budget.

- Change in the price of such good has a substantial impact on

the amount consumers are able to purchase.