Ch. 18 Elasticity.ppt

Ch. 18: Elasticity Del Mar College John Daly ?2003 South-Western Publishing, A Division of Thomson Learning Price Elasticity of Demand A measure of the responsiveness of quantity demanded to changes in price. Measured by dividing the percentage change in the quantity demanded of a good by the percentage change in its price. Economists compute price elasticity of demand using midpoints as the base values of changes in prices and quantities demanded. Computing Elasticity of Demand We divide the change in quantity demanded by the average quantity demanded, all of which is then divided by the change in price divided by the average price. Perfectly Elastic and Perfectly Inelastic Demand Percentage change in quantity demanded Ed = ------------------------------------------- Percentage change in price Elastic Demand (Ed 1): the numerator is greater than the denominator, the coefficient is greater than 1 and demand is elastic. Inelastic Demand (Ed 1): the numerator is less than the denominator , the coefficient is less than 1, and demand is inelastic. Perfectly Elastic and Perfectly Inelastic Demand Unit Elastic Demand (Ed = 1): If the numerator and denominator are the same, the coefficient is equal to one. The quantity demanded changes proportionally to a change in price. Elastic and Inelastic Demand Perfectly Elastic Demand (Ed = ∞) If the quantity demanded is extremely responsive to a change in price. Perfectly Inelastic Demand (Ed = 0) If quantity demanded is completely unresponsive to changes in price, demand is perfectly inelastic. A change in price causes no change in quantity demanded. Price Elasticity of Demand Price Elasticity of Demand and Total Revenue Total Revenue (TR) of a seller equals the price of a good times the quantity of the good sold. Total revenue may increase, decrease or remain constant. If demand is elastic, a price rise decreases total revenue. If demand is elastic, a price fall increases total revenue. If demand is inelastic, a price fall