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Elasticity and its Implications > Price Elasticity of Demand
Price Elasticity of Demand
• Defining Price Elasticity of Demand
• Measuring the Price Elasticity of Demand
• Interpretations of Price Elasticity of Demand
• Determinants of Price Elasticity of Demand
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Elasticity and its Implications > Price Elasticity of Demand
Defining Price Elasticity of Demand
• The PED is the percentage change in quantity demanded in response to a one
percent change in price.
• The PED coefficient is usually negative, although economists often ignore the
sign.
• Demand for a good is relatively inelastic if the PED coefficient is less than one (in
absolute value).
• Demand for a good is relatively elastic if the PED coefficient is greater than one
(in absolute value).
• Demand for a good is unit elastic when the PED coefficient is equal to one.
Perfectly Inelastic Demand
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Elasticity and its Implications > Price Elasticity of Demand
Measuring the Price Elasticity of Demand
• PED captures the change in quantity demanded in response to a change in the
good's own price (as opposed to the price of some other good).
• The formula for price elasticity yields a value that is negative, pure, and ranges
from zero to negative infinity.
• The result provided by the formula will be accurate only if the changes in price
and quantity demanded are small.
Sale
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Elasticity and its Implications > Price Elasticity of Demand
Interpretations of Price Elasticity of Demand
• Elastic PED can be interpreted as consumers being very sensitive to changes in
price.
• Inelastic PED can be interpreted as consumes being insensitive to changes in
price.
• Firms use PED to figure out how to change their prices in order to increase
revenue.
• PED varies along a straight demand curve.
Perfectly Elastic Demand
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Elasticity and its Implications > Price Elasticity of Demand
Determinants of Price Elasticity of Demand
• A good with more close substitutes will likely have a higher elasticity.
• The higher the percentage of a consumer's income used to pay for the product,
the higher the elasticity tends to be.
• For non-durable goods, the longer a price change holds, the higher the elasticity
is likely to be.
• The more necessary a good is, the lower the price elasticity of demand.
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Appendix
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Elasticity and its Implications
Key terms
• Cross-price elasticity of demand Measures the responsiveness of the demand for a good to a change in the price of another
good.
• elastic Demand for a good is elastic when a change in price has a relatively large effect on the quantity of the good demanded.
• inelastic Demand for a good is inelastic when a change in price has a relatively small effect on the quantity of the good
demanded.
• Own-price elasticity of demand Responsiveness of quantity demanded to a change in the good's own price
• Price elasticity of demand The percent change in quantity demanded due to a 1% change in price.
• Substitute Good A good that fulfills a consumer need in a way that is similar to another good.
• Unit Elastic Demand for a good is unit elastic when the percentage change in quantity demanded is equal to the percentage
change in price.
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Elasticity and its Implications
Perfectly Inelastic Demand
When demand is perfectly inelastic, quantity demanded for a good does not change in response to a change in price.
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Elasticity and its Implications
Sale
There is an inverse relationship between price and quantity demanded, so the elasticity coefficient is almost always negative.
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Elasticity and its Implications
Perfectly Inelastic Demand
Perfectly inelastic demand is graphed as a vertical line. The PED value is the same at every point of the demand curve.
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Elasticity and its Implications
Perfectly Elastic Demand
Perfectly elastic demand is represented graphically by a horizontal line. In this case the PED value is the same at every point of the demand curve.
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Elasticity and its Implications
Perfectly Elastic Demand
When the demand for a good is perfectly elastic, any increase in the price will cause the demand to drop to zero.
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Elasticity and its Implications
Elasticity and the Demand Curve
The price elasticity of demand for a good has different values at different points on the demand curve.
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Elasticity and its Implications
Price Elasticity of Demand and Revenue
PED is based off of percent changes, so the starting nominal values of price and quantity are significant.
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Elasticity and its Implications
The price elasticity of demand measures the responsiveness of
_____________.
A) the quantity demanded of a good to a change in a consumer's income
B) the quantity demanded of a good to a change in its price
C) the price of a good to a change in the quantity demanded
D) the price of a good to a change in a consumer's income
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Elasticity and its Implications
The price elasticity of demand measures the responsiveness of
_____________.
A) the quantity demanded of a good to a change in a consumer's income
B) the quantity demanded of a good to a change in its price
C) the price of a good to a change in the quantity demanded
D) the price of a good to a change in a consumer's income
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Elasticity and its Implications
If the price elasticity of demand for a good is relatively elastic,
then ___________.
A) a change in the price causes a large change in quantity demanded
B) a change in the price causes a small change in quantity demanded
C) a change in the price causes no change in quantity demanded
D) a change in quantity demanded causes a large change in the price
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Elasticity and its Implications
If the price elasticity of demand for a good is relatively elastic,
then ___________.
A) a change in the price causes a large change in quantity demanded
B) a change in the price causes a small change in quantity demanded
C) a change in the price causes no change in quantity demanded
D) a change in quantity demanded causes a large change in the price
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Elasticity and its Implications
If the price elasticity of demand for a product is 2.5 and its price
has increased by 3%, we can conclude that the quantity
demanded:
A) Increased by 7.5%
B) Decreased by 3%
C) Decreased by 7.5%
D) Increased by 2.5%
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Elasticity and its Implications
If the price elasticity of demand for a product is 2.5 and its price
has increased by 3%, we can conclude that the quantity
demanded:
A) Increased by 7.5%
B) Decreased by 3%
C) Decreased by 7.5%
D) Increased by 2.5%
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Elasticity and its Implications
Assume a pizza costs $10. When the price increases to $12,
demand falls 10%. What is the own-price elasticity of demand?
Note: in economics, elasticity is generally reported as a positive
number even when it is negative.
A) 0.5
B) 2
C) 5
D) 0.2
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Elasticity and its Implications
Assume a pizza costs $10. When the price increases to $12,
demand falls 10%. What is the own-price elasticity of demand?
Note: in economics, elasticity is generally reported as a positive
number even when it is negative.
A) 0.5
B) 2
C) 5
D) 0.2
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Elasticity and its Implications
When does the own-price method of calculating elasticity give
accurate results?
A) When changes in price and quantity are large.
B) When the formula for the demand function is known and when
elasticity is relatively high
C) When the formula for the demand function is known and when
elasticity is relatively low
D) When changes in price and quantity are small.
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Elasticity and its Implications
When does the own-price method of calculating elasticity give
accurate results?
A) When changes in price and quantity are large.
B) When the formula for the demand function is known and when
elasticity is relatively high
C) When the formula for the demand function is known and when
elasticity is relatively low
D) When changes in price and quantity are small.
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Elasticity and its Implications
Imagine a straight demand curve. At very low prices (and high
quantity demanded), the PED is likely ______.
A) Relatively inelastic
B) Relatively elastic
C) Unit elastic
D) Perfectly elastic
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Elasticity and its Implications
Imagine a straight demand curve. At very low prices (and high
quantity demanded), the PED is likely ______.
A) Relatively inelastic
B) Relatively elastic
C) Unit elastic
D) Perfectly elastic
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Elasticity and its Implications
Electricity is a good with few or no close substitutes. What would
you expect about the price elasticity of demand for electricity?
A) Relatively elastic
B) Perfectly elastic
C) Relatively inelastic
D) Perfectly inelastic
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Elasticity and its Implications
Electricity is a good with few or no close substitutes. What would
you expect about the price elasticity of demand for electricity?
A) Relatively elastic
B) Perfectly elastic
C) Relatively inelastic
D) Perfectly inelastic
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Elasticity and its Implications
In the short term, would you expect a non-durable good's price
elasticity of demand to be higher or lower than it is in the long
term?
A) Lower, because consumers are more likely to switch to other
substitutes over the long term
B) Higher, because there may be psychological impediments to reacting
to a change in the short term
C) Lower, because non-durable goods are more necessary in the longterm than they are in the short-term
D) Higher, because non-durable goods are more necessary in the shortterm than in the long-term
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Elasticity and its Implications
In the short term, would you expect a non-durable good's price
elasticity of demand to be higher or lower than it is in the long
term?
A) Lower, because consumers are more likely to switch to other
substitutes over the long term
B) Higher, because there may be psychological impediments to reacting
to a change in the short term
C) Lower, because non-durable goods are more necessary in the longterm than they are in the short-term
D) Higher, because non-durable goods are more necessary in the shortterm than in the long-term
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Elasticity and its Implications
Attribution
• Wikibooks. "Economics for Business Decisions/Theory of Demand and Supply." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Economics_for_Business_Decisions/Theory_of_Demand_and_Supply#Price_elasticity
• Wikibooks. "IB Economics/Microeconomics/Elasticities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/IB_Economics/Microeconomics/Elasticities#Price_Elasticity_of_Demand_.28PED.29
• Wikibooks. "A-level Economics/AQA/Markets and Market failure." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Alevel_Economics/AQA/Markets_and_Market_failure#Types_of_Price_Elasticity_of_Demand
• Wikipedia. "Price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Price_elasticity_of_demand
• Wikispaces. "13ecoHGHS - allocative efficiency 90630 (3.2)." CC BY-SA
http://13ecohghs.wikispaces.com/allocative+efficiency+90630+(3.2)
• Wikipedia. "Unit Elastic." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Unit%20Elastic
• Wiktionary. "elastic." CC BY-SA 3.0 http://en.wiktionary.org/wiki/elastic
• Wikipedia. "inelastic." CC BY-SA 3.0 http://en.wikipedia.org/wiki/inelastic
• Wikipedia. "Price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Price_elasticity_of_demand
• Wikispaces. "MBAecon - elasticity of demand." CC BY-SA http://mbaecon.wikispaces.com/elasticity+of+demand
• Wikipedia. "Price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Price_elasticity_of_demand
• Wikipedia. "Cross-price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Crossprice%20elasticity%20of%20demand
• Wikipedia. "Own-price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Ownprice%20elasticity%20of%20demand
• Wikibooks. "IB Economics/Microeconomics/Elasticities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/IB_Economics/Microeconomics/Elasticities
• Wikibooks. "IB Economics/Microeconomics/Elasticities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/IB_Economics/Microeconomics/Elasticities
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Elasticity and its Implications
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/price-elasticity-of-demand9c279af4-8145-4e9f-bdea-0b8cf58c192a
• Wikispaces. CC BY-SA http://ib-economics-daa.wikispaces.com/file/view/elastisity_new.ppt?
• Wikipedia. "Price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Price_elasticity_of_demand
• Wikibooks. "IB Economics/Microeconomics/Elasticities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/IB_Economics/Microeconomics/Elasticities
• Wikipedia. "Price elasticity of demand." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Price_elasticity_of_demand
• Wikispaces. "13ecoHGHS - allocative efficiency 90630 (3.2)." CC BY-SA
http://13ecohghs.wikispaces.com/allocative+efficiency+90630+(3.2)
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/substitute-good
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