...250-360-1560 Transit Price Elasticities and Cross-Elasticities 25 May 2012 Todd Litman Victoria Transport Policy Institute Abstract This paper summarizes price elasticities and cross elasticities for use in public transit planning. It describes how elasticities are used, and summarizes previous research on transit elasticities. Commonly used transit elasticity values are largely based on studies of short- and medium-run impacts performed decades ago when real incomes where lower and a larger portion of the population was transit dependent. As a result, they tend to be lower than appropriate to model long-run impacts. Analysis based on these elasticity values tends to understate the potential of transit fare reductions and service improvements to reduce problems such as traffic congestion and vehicle pollution, and understate the long-term negative impacts that fare increases and service cuts will have on transit ridership, transit revenue, traffic congestion and pollution emissions. Originally published as “Transit Price Elasticities and Cross-Elasticities,” Journal of Public Transportation, Vol. 7, No. 2, (www.nctr.usf.edu/jpt/pdf/JPT 7-2 Litman.pdf), 2004, pp. 37-58. Todd Litman 2004-2011 You are welcome and encouraged to copy, distribute, share and excerpt this document and its ideas, provided the author is given attribution. Please send your corrections, comments and suggestions for improvement. Transit Elasticities and Price Elasticities Victoria Transport...
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...A. 1. Elasticity of demand: According to McConnell, Elasticity of demand is the degree to which changes in prices and incomes affect the supply and demand,” (p 76). In other words elasticity tells us how much a price change effects sales or demand of a product. Elasticity can be measured and referred to as: elastic, unit elastic or inelastic. Elasticity of demand is measured: Ed=percentage change in quantity demanded of productpercentage change in price of product If the result is a coefficient greater than one the product price is elastic, if the result is equal to one it is considered unit elastic, and if the coefficient is less than one it is inelastic. 2. Cross-price elasticity: Cross-price elasticity refers to the elasticity of a product when there is a substitute, or compliment product to be considered. According to McConnell, (2012) “The cross elasticity of demand measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y). “ A substitute product is a product that can be used in place of the original product, at the consumer’s discretion. A compliment is a separate product that is generally purchased to be used with the original product, like peanut butter and jelly. E xy =percentage change in quantity demanded of product xpercentage change in price of product y If the coefficient results are more than zero, the product is considered a substitute product. If the result...
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...importance of Price elasticity of demand and Cross elasticity of demand 1. Price elasticity of demand (Ed) used to generate the revenue. It shows the percentage change in quantity demanded in response to a one percent change in price. The biggẻ the number, the more people’s respond to the price. Interpreting values of price elasticity coefficients Perfectly inelastic demand[10] Perfectly elastic demand[10] Elasticities of demand are interpreted as follows:[10] Value | Descriptive Terms | | Perfectly inelastic demand | | Inelastic or relatively inelastic demand | | Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand | | Elastic or relatively elastic demand | | Perfectly elastic demand | Effect on total revenue Generally any change in price will have two effects * The price effect: for inelastic goods, an increase in unit price will tend to increase revenue and vice versa. * The quantity effect: an increase in unit price will tend to lead to fewer units sold and vice versa. The relationship between PED and total revenue: * When Ed = 0, changes in the price do not affect the quantity demanded for the good; price increase will raise the total revenue. * When -1 < Ed < 0, the percentage change in quantity demanded is smaller than that in price =>...
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...Gasoline, Substitutes, and Cross-Price Elasticity of Demand: Long-run vs. Short-run Over the weekend, The NYTimes led with a story that as gasoline prices rise and are expected to remain high, many commuters are switching from driving to using public transportation. Mass transit systems around the country are seeing standing-room-only crowds on bus lines where seats were once easy to come by. Parking lots at many bus and light rail stations are suddenly overflowing, with commuters in some towns risking a ticket or tow by parking on nearby grassy areas and in vacant lots.... Some cities with long-established public transit systems, like New York and Boston, have seen increases in ridership of 5 percent or more so far this year. But the biggest surges — of 10 to 15 percent or more over last year — are occurring in many metropolitan areas in the South and West where the driving culture is strongest and bus and rail lines are more limited.... The national average for regular unleaded gasoline reached $3.67 a gallon, up from $3.04 a year ago, according to AAA. If nothing else had changed, then a roughly 20% increase in the price of gasoline appears to have led to maybe a 10% increase in the demand for public transportation. The cross-price elasticity of demand appears to be approximately +0.5. But these numbers are for now. Remember when gasoline prices were so high shortly after hurricane Katrina? At that point, people did not expect them to remain high, and so there was...
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...Business Task 2 Egt1: Task 2 A) Elasticity of demand is describes as the degree of percentage change in demand for a good or service due to variation in price. Elasticity measurements can be expressed by three types of demand; inelastic demand, unit elastic demand, or relatively elastic demand. To determine the percentage of change in demand for a product or service the price elasticity equation and coefficient are used. The coefficient Ed is defined as “the percentage change in quantity demanded of product divided by the percentage change in price of product X” (McConnell, Brue, Flynn, 2012, pg. 76) The three expressions of Ed are Elastic, Inelastic, and Unit Elasticity. Elastic demand occurs “if a specific percentage change in price results in a larger percentage change in quantity demanded” (McConnell, Brue, Flynn, 2012, pg. 77). For a product with inelastic demand Ed < 1. An example of elastic demand is when there is a 2% decrease in the price of chocolate that results in a 6% increase in quantity. Ed= .06/.02 = 3 Inelastic demand occurs “if a specific percentage change in price produces a smaller percentage change in quantity demanded.”(McConnell, Brue, Flynn, 2012, pg. 77) For products with inelastic demand Ed <1. An example of inelastic demand is when there’s a 2% decrease in the price of milk that results in a 1% increase of demand. Ed= .01/.02 = .5 Unit elasticity of demand occurs “where a percentage change in price and the resulting percentage change in...
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...Pepsi, A reflection on its price & income elasticity Laura-Ashley Williams Colorado Technical University Author Note This paper was prepared for [ECON212], [CS13-01], taught by [Professor James Pirner] on [July 23, 2014]. Introduction The product chosen was Pepsi. It is a product produced by PepsiCo, which is one of the world's top marketer of premium juices and soft drinks. PepsiCo offers products to over 200 countries and territories, and our Global Brands are our biggest sellers. Pepsi is a carbonated soft drink sold in stores, restaurants, and vending machines internationally. Pepsi-Cola was created in the late 1890s by Caleb Bradham, a New Bern, N.C. pharmacist. Pepsi is one of the world’s most iconic and recognized consumer brands globally. Today, the Pepsi portfolio includes three products - Pepsi, Diet Pepsi and Pepsi MAX — that each generates more than $1 billion in annual retail sales. Today, more than ever, consumers are seeking new options for their snacking and beverage occasions. And now, more than ever, PepsiCo is strongly committed to providing a wide range of foods and beverages, from treats to healthy eats. In order to understand how Pepsi remains a product that meets or exceeds the customers’ expectations, I will describe the price and income elasticity of the product. Also, explaining any cross-elasticities that are involved. Pepsi's Price Elasticity The elasticity of demand for a commodity is the rate...
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...article. Specifically, it further examines the suggestion for heavy tax on alcohol concerning the elasticities of demand for alcohol. Question 1: Using the data provided in the article, calculate the price elasticity of demand for alcohol. According to Jackson, McIver and Wilson (2012, p.153), own-price elasticity of demand which is simply know as elasticity of demand is a way to measure the sensitiveness of consumers’ demand to a change in the product’s price, and the formula to calculate it is the percentage change in quantity demanded of a good divided by the percentage change in its price. The law of demand illustrates that the price and quantity demanded are inversely related verifying from the down-sloping demand curve, therefore the own-price elasticity must be negative. However, it is conventional to ignore the negative sign, and simply use the absolute form of the elasticity of demand. In this article, it shows that for a 10 percent increase in price of alcohol could have about 5 percent decrease in consumption. According to above formula, the price elasticity of demand for alcohol is 0.5 (5%/10%). Moreover, one (1) is an important value for elasticity of demand by using absolute form. If the elasticity of demand is more than 1, it shows a relatively larger change in quantity demanded for a given change in price and the product is elastic demand. While the elasticity coefficient is less than 1, it indicates a...
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...Chapter 4 Elasticity • • • • I. The price elasticity of demand measures how strongly demanders respond to a change in the price of a good. The price elasticity of demand can be used to make quantitative predictions of how changes affect the price and quantity demanded of a good. The income elasticity of demand measures how strongly demanders respond to a change in income, and the cross elasticity of demand measures how strongly demanders respond to the change in the price of another good. The price elasticity of supply measures how strongly suppliers respond to a change in the price of a good. Price Elasticity of Demand • In general, elasticity measures responsiveness. The price elasticity of demand measures how responsive demanders are to a change in the price of the good. This information is often useful for both businesses and governments. • The price elasticity of demand is a units-‐free measure of the ...
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...Microeconomics ------------------------------------------------- TUTORIAL 4: Application of Elasticity (Part 1) Question 1 Suppose your demand schedule for DVDs is as follows. Price (RM) | Quantity Demanded | 8 | 40 DVDs | 10 | 32 | 12 | 24 | 14 | 16 | 16 | 8 | (a) Using mid-point formula, calculate the price elasticity of demand for the following; (i) Price increase from RM 12 to RM 14 (ii) Price increase from RM 14 to RM 16 (6 marks) (b) What are the factors that affect price elasticity of demand? (6 marks) Question 2 Suppose your demand schedule for books is as follows. Price (RM) | Quantity Demanded(Income = RM3,000) | Quantity Demanded(Income = RM6,000) | 20 | 38 books | 60 books | 22 | 32 | 54 | 24 | 22 | 46 | 26 | 14 | 32 | 28 | 8 | 24 | (a) Using mid-point formula, calculate your price elasticity of demand as the price of books increases from RM20 to RM22 if (i) your income is RM3,000, (ii) your income is RM6,000 (6 marks) (b) Using mid-point formula, calculate your income elasticity of demand as your income increases from RM 3,000 to RM 6,000 if (i) the price is RM24, and (ii) the price is RM26. (6 marks) Question 3 Assume that the price of Good B has risen by 10 percent and the quantity demanded of Good A decreases by 20 percent. (a) Calculate the cross elasticity of demand between the two goods. (2 marks) (b) Determine the relationship between...
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...EGT 1: Task 2-309.1.2-08 & 09 Elasticity of demand is the relationship between the demands for a product with respect to its price. Generally, when the demand for a product is high, the price of the product decreases. When demand decreases, prices tend to climb. Products that exhibit the characteristics of elasticity of demand are usually cars, appliances and other luxury items. Items such as clothing, medicine and food are considered to be necessities. Essential items usually possess inelasticity of demand. When this occurs prices do not change significantly. “The Cross-price elasticity of demand measures the rate of response of quantity demanded of one good, due to a price change of another good” (Economics.about.com, 2013). When two similar products are present they are considered to be substitutes for each other. For example, say you have Coke and Pepsi. When the price of Coke rises so will the increased demand for Pepsi and other like products. This is considered to be a positive relationship. The relationship is negative when you have two products that complement each other. For example, say the price of a car increases. When price escalates the demand for tires, its complementary product, will decrease. Income elasticity is a way that economists measure the level that people act in response to changes in their income that may effect the consumer purchasing more or less of a product. This form of measurement helps to classify products as inferior...
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...will be given on elasticity of demand, cross price elasticity, and income elasticity. Followed by an example to discuss why demand tends to be relatively elastic where available substitutes exist. Then the “Proportion of Income Devoted to a Good” concept will be discussed by contrasting two products purchased. It will be addressed how the same percentage change in price affects the percentage change in the quantity demanded. Next, the “Consumer’s Time Horizon” concept will be utilized in contrasting a person’s response to large price increase in the short run and the long run. The graphs will be used to identify price range areas on the demand curve where demand is elastic, inelastic, and unit. Finally, the corresponding impact on total revenue for each of the three price ranges will be explained. Elasticity of demand shows responsiveness of change in price for quantity demanded. Elasticity of demand can be characterized as elastic, unitary or inelastic. Elasticity of demand is said to be elastic when change in quantity demanded do to price change is large. Conversely, when the rate of quantity demanded is small compared to price change it is termed inelastic. Refer to elasticity of demand as unitary when price change and quantity demanded move at an equal rate. The two will move together at a ratio of one. Cross price elasticity refers to how the quantity demanded of one good is affected by a price change of another good. The cross price elasticity value is positive...
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...Assignment on Elasticity of Demand. 1. Suppose the price of a particular good increases from $95 to $105. As a consequence, you decrease your purchases of the good from 21 units to 19 units. a. What is the price elasticity of demand for this good? b. Is demand for this good elastic, inelastic, or unit elastic? ___________________________ c. Interpretation of the elasticity: A one percent increase in the price of the good would be expected to result in a __________ percent decrease in the quantity demanded of the good. d. What is the total expenditure on this good before the price change and after the price change? e. Did total expenditure on the good increase, decrease, or remain the same? _______________ 2. Suppose the price of particular good increases from $95 to $105 as a result, your purchases of the good decrease from 41 units to 39 units. a. What is the price elasticity of demand for this good? b. Is demand for this good elastic, inelastic, or unit elastic? ___________________________ c. A one percent increase in the price of the good would be expected to result in a __________ percent decrease in the quantity demanded of the good. d. What is the total expenditure on this good before the price change and after the price change? e. Did total expenditure on the good increase, decrease, or remain the same? _______________ 3. Suppose the price of particular good increases from $95 to $105. You then decrease your purchases...
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...Elasticity Presented to:- Dr. Hamde Abd-el-Azem Sadat academy for management sciences Done by:- Ahmed gamal Ezz el-Din G: group 4 S: Managerial economics The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life. To determine the elasticity of the supply or demand curves, we can use this simple...
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...Elasticity of demand is the degree to which demand for a good or service varies with its price. Elasticity of demand is seen most with confectionary and other non-essentials such as cars and appliances. Sales go up as prices go down and as prices go up sales go down. Cross-price elasticity measures the responsiveness of demand for a good that occurs in response to a percentage change in the price of another good. Complements are goods with a negative cross of elasticity demand. These goods are normally used with each other such as cars and gas. As the price of gasoline goes up the sale for cars goes down. In contrast, substitutes are goods with a positive cross elasticity demand. As the price of one good increases the demand for another good will also increase. As the price of butter increases consumers will buy more margarine. Income elasticity measures the change in quantity demanded of a good and the change in income for the people using that good. If income is increased by 20% and the demand for a good is increased by 30%, the income elasticity would be 1.5. When there is negative income elasticity, the increase in income will cause a decrease in inferior goods, and possible the increase in luxury substitutes. As income increases, the demand for inexpensive cars will fall and the demand for higher-end models increases. The inexpensive car is considered an inferior good . The opposite of inferior goods is normal goods. Normal goods have positive income elasticity...
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... 1. Elasticity of demand measures the change in the quantity demanded due to the price changes in the market. This can also be characterized as a change in percentage to both the quantity demanded and the price. Durable items, such as appliances or automobiles, show elasticity of demand because these products can be bought infrequently and are not a consumer necessity. These durables can be purchased at leisure or when the prices are low. Elasticity of demand is measured by the number of substitutes available, the degree of necessity, and the price of a good as a proportion of income. Cross-price elasticity is a measure between the price changes or demand for one good affects the change in the price of another good. When the cross-price elasticity is negative, goods are referred to as complements. If there is an increase in price of a good that results in the decrease of the quantity demanded of another product, then both products are considered to be complements of each other. When the cross-price elasticity is positive, goods are called substitutes. If there is an increase in the price of one product that results in the increase of the quantity demanded of another product, then both products are seen as substitutes. Because of cross-price elasticity, goods that compete with one another are often paired together in the market (economics.about.com). Income elasticity measures the change between the quantity of a good demanded and a change in income. Income elasticity is the...
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