...File C5-207 July 2007 www.extension.iastate.edu/agdm Elasticity of Demand E lasticity of demand is an important variation on the concept of demand. Demand can be classified as elastic, inelastic or unitary. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small. The formula for computing elasticity of demand is: (Q1 – Q2) / (Q1 + Q2) (P1 – P2) / (P1 + P2) If the formula creates a number greater than 1, the demand is elastic. In other words, quantity changes faster than price. If the number is less than 1, demand is inelastic. In other words, quantity changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price. Close substitutes for a product affect the elasticity of demand. It another product can easily be substituted for your product, consumers will quickly switch to the other product if the price of your product rises or the price of the other product declines. For example, beef, pork and poultry are all meat products. The declining price of poultry in recent years has caused the consumption of poultry to increase, at the expense of beef and pork. So products with close substitutes tend to have elastic demand. Figure 1. Elastic demand Elastic Demand Elasticity of demand is illustrated in Figure 1. Note that a change in price...
Words: 689 - Pages: 3
...PAPER FIRST SEM MBA MANAGERIAL ECONOMICS “Kinds Of Elasticity Of Demand” “Factors Influencing Elasticity Of Demand” GROUP 2 ROLL NO | NAME | 7 | PRAVEEN KUMAR K L | 8 | PRAVEEN R | 9 | PRITHVI LINGH HONNESH | 10 | PRITHVI P M | 11 | PRIYA DARSHINI B A | 12 | PRIYANKA JAHAGIRDAR | ------------------------------------------------- ABSTRACT From the managerial point of view, the knowledge of nature of relationship between demand and its determinants alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in its determinants is called elasticity of demand. The concept of elasticity of demand plays a crucial role in business-decisions regarding maneuvering of prices with a view to making larger profits. Almost most businessmen are intuitively aware of the elasticity of demand of the goods they make, however, the use of precise estimates of elasticity of demand will add precision to their business decisions. In this paper we will discuss * The various kinds of elasticity of demand * The nature of change and how it affects the decision taking. * How demand decisions in response to price changes vary for different types of goods? * Factors influencing the elasticity of demand INTRODUCTION Governments, business firms, supermarkets, consumers...
Words: 2882 - Pages: 12
...Elasticity of Demand Concepts and Measurement In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior. Rate at which demand changes due to particular change of price of the commodity or price of other commodity or income of the consumer is called elasticity of demand. Elasticities greater than one are called "elastic," elasticities less than one are "inelastic", and elasticities equal to one are "unit elastic". Elasticities equal to infinity is called "perfectly elastic demand". Also elasticities equal to zero is called "perfectly inelastic demand". Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. One example is the price elasticity of demand; this measures how the quantity demanded changes with price. This is important for setting prices so as to maximize profit. When price elasticity of demand is elastic, the firm should lower prices, since it will result in a big uptick in demand, increasing your total revenue. When price elasticity of demand is inelastic, the firm should increase prices because there will be only a...
Words: 2545 - Pages: 11
...Demand Elasticity ECON 1580 Unit 2 Written Assignment University of the People February 9, 2016 Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day. 1. Compute the price elasticity of demand between these two points. a. The price elasticity of the first two points ($20 @ 400 meals; $18 @ 450) is -1.117 2. Would you expect total revenues to rise or fall? Explain. b. The total revenue will rise because the demand is Price Elastic, meaning the absolute value of the demand elasticity is greater than 1. When demand is price elastic, a decrease in price will yield an increase in revenue. 3. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points. c. The price elasticity of the second two points ($18 @ 450 meals; $16 @ 500 meals) is -0.895 4. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain. d. The total revenue will fall because the demand is Price Inelastic, meaning the absolute value of the demand elasticity is less than 1. When demand is...
Words: 357 - Pages: 2
...Market Demand and Elasticity Tank Up is a local quick mart gas station on Route 12, a fairly busy highway most days of the week. Tank Up is the last station eastbound just prior to the entrance ramp to the expressway. This location benefits Tank Up business because drivers often stop in to fill their gas tank and grab a cup of coffee before beginning their journey on the expressway. To increase profits, I am evaluating a price change for coffee. Historically Tank Up sells approximately 300 cups of coffee per day. At $0.79 per cup, annual coffee revenue is $86,268. Options to increase revenue include a) an increase in sales prompted by a price reduction or b) an increase in revenue through a price increase. For the purpose of this evaluation, it is assumed all factors beyond cost per cup and consumer demand are held constant. The supply costs for coffee beans, creamer, cups and other supplies are not a factor in this assessment. Below are the factors considered. Price Elasticity of Demand As noted above, annual coffee revenues are estimated at $86,268. To evaluate price elasticity of demand, a calculation was required to determine if an adjustment in price (increase/decrease) resulted in a change in consumer demand. The first step was to evaluate the impact of increased sales because of price reduction. When reducing the price per cup 13% (to $0.69) sales increased 7% (320 cups per day). Although demand increased, annual revenue declined 7% ($5,897). This change...
Words: 1222 - Pages: 5
...Price elasticity of demand is the measurement of how responsive a good or service is demanded based on a percentage change in price. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the price of the good or service. There are many factors that the price elasticity of demand that are considered such as ranges, determinants and relationships with revenue. Price elasticity of demand has three ranges when determined. The first is elastic demand. Elastic demand occurs when the price elasticity demand is greater than one. It occurs when a change in price of one percent causes one percent change in quantity demanded. Another range of elasticity is unit elasticity of demand. It occurs when a change of one percent causes exactly one percent to change in quantity demanded. A third range is inelastic demand. It is the opposite of elastic demand. It occurs when a change of a price of one percent is less than one percent in the quantity demanded (Miller, 2013). There three main determinants of price elasticity of demand. One determinant is the existence, number, and quantity of substitutes. The closer the substitutes for a certain product or service exist as well as the amount, the greater the price of the elasticity demanded will be. The second determinant is the percentage of a consumer’s total budget devoted to purchase the commodity. The greater the share of a person’s budget spent of a product or service, the greater the person’s...
Words: 422 - Pages: 2
...Price elasticity of demand From Wikipedia, the free encyclopedia Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Contents [hide] * 1 Definition...
Words: 3410 - Pages: 14
...Assignment: Show that Price Elasticity of demand (Ep) changes from 0 to -∞ as we move along the linear demand curve. Solution: Demand Curve: Relationship between the quantities of a good that consumers are willing to buy and the price of the good. Linear Demand Curve: Demand Curve that is a straight line. In mathematical form, it can be defined as Q = a – bP Where Q = Quantity demanded; P = Price per unit of the good; and a, b = constants Elastic range Price Ep = -∞ (PerfectlyElastic) Q = a- bP . Ep = -1(Unitory elastic) Inelastic range Ep = 0 (Perfectly inelastic) Quantity Price Elasticity of Demand: Percentage change in quantity demanded of a good as a result from a 1- percent increase in its price. In mathematical form, it can be defined as Ep = ΔQ/Q = (P/Q) (ΔQ/ΔP) …………..(1) ΔP/P Where Q, P = same as above ΔQ = Change in quantity demanded ΔP = Change in Price per unit of the good Consider the Linear demand curve Q = a-bP Differentiating the above equation w.r.t. price, we have change in quantity w.r.t change in price ΔQ/ΔP = -b …………….(2) Substituting (2) in equation (1), we have, Ep = (P/Q) (-b) = (-Pb)/Q …………………..(3) From Equation (3), when P ...
Words: 381 - Pages: 2
...Income Elasticity of Demand Income Elasticity of Demand is a measure of responsiveness of demand to the changes in income and it involves demand curve shifts. It provides information on the direction of change of demand, given a change in income and the size of the change. Formula for YED: Percentage change in quantity demanded = %ΔQ Percentage change in income %ΔY Normal goods have a positive value of YED, while Inferior goods have a negative value of YED as shown in the graph below: Normal goods: when income increases, demand for normal goods increases as well. An increase in income leads to an increase in consumption, demand shifts to the right Inferior goods: when income increases, demand for this good falls. The demand curve shifts left as income rises. As income rises, the proportion spent on food tends to fall while the proportion spent on services tends to rise. Necessity and Luxury goods Necessity YED <1 If a good has a YED that is positive but less than one, it has income inelastic demand: a percentage increase in income produces a smaller percentage increase in quantity demanded. Necessities are income inelastic goods, such as food and shoes. Luxury YED >1 If a good has a YED that is greater than one, is has income elastic demand: a percentage increase in income produces a larger percentage increase in quantity demanded. Luxuries are income elastic goods. Like the I Phone or chewing gum. Applications of Income...
Words: 556 - Pages: 3
...Price Elasticity of Demand | | In this chapter we look at the idea of elasticity of demand, in other words, how sensitive is the demand for a product to a change in the product’s own price. You will find that elasticity of demand is perhaps one of the most important concepts to understand in your AS economics courseDefining elasticity of demandPed measures the responsiveness of demand for a product following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is:“Percentage change in quantity demanded divided by the percentage change in price”Since changes in price and quantity nearly always move in opposite directions, economists usually do not bother to put in the minus sign. We are concerned with the co-efficient of elasticity of demand.Understanding values for price elasticity of demand * If Ped = 0 then demand is said to be perfectly inelastic. This means that demand does not change at all when the price changes – the demand curve will be vertical * If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. Producers know that the change in demand will be proportionately smaller than the percentage change in price * If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total...
Words: 2787 - Pages: 12
...INCOME ELASTICITY OF DEMAND Income is a factor that can help to determine how much or how many units a product or service can sell in a determined period of time. Thus, changes in income are important to be monitored, as well as understanding the kind of good we have. To do this, we use Income elasticity of demand (Ey) which measures the effect of a change in income in quantity demanded. The basic formula for calculating the coefficient of income elasticity is: Percentage change in quantity demanded of a good divided by the percentage change in real consumers' income. Depending in the result of this equation the good can be thought as a normal good when the result is > 0 (positive income elasticity), or an inferior good when the result is < 0 (negative income elasticity). Within the category of normal goods there is a distinction between necessities and luxuries. A luxury will have an Ey >1. To categorize income elasticity of demand we check to see if it is more, equal or less than 1. If it is more is elastic, if it is less is inelastic and if it is equal is unit elastic and quantity demanded changes by the same percentage as the price. Normal goods As income rise more is the demand. The house market in San Diego County is an example of a normal good that has turned for some into a luxury although housing is per se a need. In a recent article from Union Tribune San Diego was ranked as the second less affordable city to buy a house in the United States (Horn, 2014). Indeed...
Words: 748 - Pages: 3
...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...
Words: 1872 - Pages: 8
...I. The 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...
Words: 777 - Pages: 4
...QUESTION: price elasticity of demand for textbooks is two and the price of the textbook is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in the quantity demand. Price elasticity of demand (PED) is defined as the responsiveness of the quantity demanded of a good or service to a change in its price. Price Elasticity of Demand Percentage Change in Quantity Demand Percentage Change in Price for Product A So, Percentage Change in Quantity Demand for Product A = PED X Percentage Change in Price for Product A Given PED of Books= 2, Percentage Change in Price for Books = 10% So, Percentage Change in Demand for Books = 2 X 10% = 20% Therefore the fall in the Quantity Demand of the Books will be 20% Price elasticity of demand Therefore, it is percentage change in quantity demanded by the percentage change in price of the same goods. In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, which it measures the relationship as the ratio of percentage changes between quantities demanded of a good and changes in its price. In other words, demand for a product can be said to be very inelastic if consumers are insensitive to the price and is willing to pay for the product at any price, and very elastic is when consumers are more price sensitive and will only pay a certain price, ...
Words: 676 - Pages: 3
...Page | | Table of Content | | 1.0 | Introduction……………………………………………………............................. | 1 | 2.0 | Price Elasticity of Demand for Sugar2.1 Availability of Close Substitutes……………………………………………….2.2 Length of Time Involved…...…………………………………………….........2.3 Necessities versus luxuries……………………………………………………..2.4 Definition of market……………………………………………………….......2.5 Share of sugar in the consumers’ budget…………………………………....... | 2 – 345 – 67 – 89 – 10 | 3.0 | Conclusion……………………………………………………………………….... | 11 | 4.0 | Bibliography……………………………………………………………………..... | 12 | | Appendix…………………………………………………………………............... | 13 | Table of Figures Figure | Page | Figure 1: Availability of close substitutes for sugar…………………………………. | 3 | Figure 2: Differences of long run and short run for price hike in sugar…………….. | 4 | Figure 3: Differences between necessity goods (sugar) and luxury goods (honey)…. | 6 | Figure 4: Differences between narrow market and broad market……………………. | 8 | Figure 5: Differences between middle-income and low-income consumers with high-income consumers……………………………………………………………… | 10 | 1.0 Introduction According to the article that was chosen, the Price Elasticity of Demand for Sugar in Malaysia is focused. The group members interpreted and analysed the article based on the core microeconomic concept of Elasticity. The analysed article is attached in the Appendix. The article is mainly regarding the issue of decreasing the subsidy for...
Words: 1885 - Pages: 8
