...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
...Price Elasticity of Demand Example Questions Review: First, a quick review of Price Elasticity of Demand from lecture on 02/19/09. The definition, of Price Elasticity of Demand (PED) is: Price Elasticity of Demand = Percentage Change in Quantity Demanded = %ΔQD Percentage Change in Price %ΔP In order to calculate the PED we need two points on the demand curve, (QD1 , P1 ) and (QD2 , P2 ) . We use the midpoint formula, so: QD2 − QD1 ⎛ QD2 ⎜ ⎜ PED = ⎝ P2 ⎛ P2 ⎜ ⎝ + QD1 ⎞ ⎟ ⎟ 2 ⎠ − P1 + P1 ⎞ ⎟ 2 ⎠ Once we have calculated the PED between two points on the demand curve, we can say if demand between those points is “elastic,” “inelastic” or “unit elastic”: • • • Demand is “elastic” at a certain point if PED < -1 Demand is “inelastic” at a certain point if 0 > PED > -1 Demand is “unit elastic” at a certain point if PED = -1 There are a number of factors that can determine if a demand curve will be more elastic, or more inelastic (we will talk more about these factors on Tuesday, 02/24/09): Four Factors Affecting PED: 1. 2. 3. 4. Availability of close substitutes Necessities vs. luxuries Definition of Market Amount of time 1 When calculating different elasticities it is very important to keep in mind, what information you need to calculate a certain elasticity and what information you have available. Also, sometimes there is information that is not relevant to certain elasticities. Be sure you are aware of what information is necessary and what information...
Words: 1037 - Pages: 5
...|A Report on | |Elasticity and Related Problems | |A Report on | |Elasticity and Related Problems | Course Title: Microeconomics Course Code: F – 106 Submitted To: Lubna Rahman Lecturer Department of Finance University of Dhaka Submitted By: |Serial No. | | | |Name | | | |ID No. | | | | | | | |01. | | | |Md. Tanvir Ahmed Chy ...
Words: 2733 - Pages: 11
...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
...Date 28-Mar-15 Question No. 1 If a demand curve is elastic, total revenue falls when the price rises discuss it in detail? Answer: Elasticity of demand is an important concept of demand. Therefore it is important to understand the concept of demand elasticity before we discuss the effect of elasticity on total revenue of any organization. Demand Elasticity Demand elasticity can be defined as measuring the responsiveness of demand due to change in price of the product. It can be measured by using following formula; PED = Percentage change in demandPercentage change in price It can be classified into three categories * Elastic demand (When % change in demand is greater than % change in price in other words answer of PED is greater than one) * Inelastic demand (when % change in demand is less than % change in price in other words answer of PED is less than one) * Unit elasticity (When % change in demand is equal with % change in price) Now consider an organization facing the downward sloping demand curve. Total revenue of the organization received by selling the product can be measured by multiplying the quantity sold with its price. Total revenue = Price * Quantity Sold Suppose organization wants to increase the price of the product then there will be two effects. A price effect: After a price increase, each unit sold for higher price, which tends to raise revenue A quantity Effect: After a price increase, fewer units are sold, which tends...
Words: 630 - Pages: 3
...Concept of Price Elasticity and Total Revenue The importance of the price elasticity of demand for a business can be shown by the effect that it has on total revenue. The business will want to know whether a proposed price change will increase or decrease total revenue. Total revenue, by definition, is equal to the price times the quantity sold (TR=PxQ). [sometimes, when dealing with elasticity, the language used may call this total expenditures instead of total revenue, but it has the same meaning].Note what happens to the results of this formula (TR=PxQ) if a price change is involved. Due to the law of demand, the price will move in one direction, and the quantity sold will move in the other direction. Unless the price change and quantity change are both for the same percentage (unit elastic), then total revenue will also change whenever a price change is involved. The question is, does total revenue increase, or decrease? The answer depends on the direction of the price change along with the price elasticity of demand. If the price elasticity of demand is elastic (greater than 1), then that means that the quantity change is more than the price change. So total revenue (price times quantity) will decrease for a price increase, and increase for a price decrease. If the price elasticity of demand is inelastic (less than 1), then that means that the quantity change is less than the price change. So total revenue (price times quantity), increases for a price increase,...
Words: 1106 - Pages: 5
...PED Price Elasticity Demand When price Quantity demanded When price Quantity demanded We have to Study not the direction of the change but the degree of the change If the price Quantity demanded markedly : Elastic = High response If the price Quantity demanded not markedly ( Low response ) Elastic = low response this is very important in Pricing Strategy In Elastic case : Reduce the price as long as it is still profitable In Inelastic case : Raise the price as long as It is accept Socially In Inelastic will not stay inelastic forever ; either turn into elastic or the demand will decreases Price changes with change in elasticity What is PED? Definetion of PED ? Calculation of PED , Degree of elasticity ? Importance of PED ? Pricing policy Determinant of PED ? Important or not ? Is there a substitute or not ...
Words: 1049 - Pages: 5
...document subtitle] | Elodie Henry | Elasticity of demand | a) Explain the concepts of price elasticity of demand, income elasticity of demand, and cross elasticity of demand. In economics, demand elasticity refers to the responsiveness of demand due to changes in other economic variables. It is an important concept introduced by the economist A. Marshall, which helps firms to anticipate effects of changes in economic variables so as to adopt an optimal competitive behavior. To better understand the concept of elasticity of demand we will first concentrate on the economic factors affecting demand. Demand is referred to as being the amount of goods and services that consumers want and have the capacity to buy at a specific price and location for a particular period in time. It is very important for demand to be effective that the consumers have the purchasing capacity and willingness to buy the goods or services. There are five main factors that determine the demand for a good; the price of the product, the prices of other products, the consumer’s income and wealth, the consumer’s tastes and the various individual- specific or environmental factors. For the concern of this essay we are going to concentrate on the 3 first determinants of demand mentioned above and how they are measured. The first factor influencing demand is the price of the good itself. Consumers react according to the price set by the producer. The lower the price the greater will be the amount of goods...
Words: 2495 - Pages: 10
...absence of any price floor, consumer surplus is the area below the demand curve but above the equilibrium price. Equilibrium price = $0.13 Equilibrium quantity = 211.5 billion pound. So, consumer surplus = ½ * (0.2-0.13)*211.5 = $7.403 billion B) Producer surplus is the area above the supply curve but below the equilibrium price. Producer surplus = ½ *(0.13-0.06)*211.5 = $7.403 billion C) Total surplus = consumer surplus + producer surplus = $7.403 billion + $7.403 billion = $14.806 billion D) With the price floor at $0.17 per pound, consumer surplus is the area below the demand curve but above the price. Consumer surplus = ½ * (0.20-0.17)*211 = $3.165 billion E) With the price floor at $0.17 per pound, producer surplus is the area above the supply curve but below the price. Producer surplus = ½* (0.17-0.06)*212.5 = $11.688 billion F) USDA buys 1.5 billion pounds of cheese at a price $0.17 per pound. So, USDA spends $0.17*1.5 billion = $0.255 billion G) Total surplus when there is price floor = consumer surplus + producer surplus - money spent by the USDA = $3.165+$11.688-$0.255 = $14.598 billion H) This is less than the total surplus without price floor. Problem - 2 A) Using midpoint method, PED. = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)] When the price of an ice cream cone rises from $1 to $2 then P1 = $1, P2 = $2 Q1 = 3000, Q2 = 2400 PED = -0.22222/0.66667...
Words: 392 - Pages: 2
...2. | Price elasticity of demand | Electricity | 0.12 | Foreign Travel | 1.5 | Jewelry | 2.9 | Based on the table above, explain the Price Elasticity of Demand value of the THREE goods and services and of what use is this information to business managers whose firms sell these products or services. Answers: d Price Quantity The price elasticity of demand measures the responsiveness of the quantity demanded to changes in the price. When the price elasticity of demand of a product is inelastic (Ped < 1), a change in price will bring about a proportionately smaller change in the quantity demanded. When there is an increase in price, it will result to a proportionately smaller decrease in the quantity demanded. Electricity is an essential good. Therefore, it has an inelastic demand of 0.12. With the information known that demand for electricity is relatively inelastic, business managers whose firms produce electricity will now imply an increase in the price to increase their total revenue. Total revenue can be calculated by the quantity of sales multiplied by the price per sale. When the business managers increase the price of electricity services, it will only result in a small decrease in the quantity demanded. Therefore, business managers will increase the price of electricity to obtain a greater amount of revenue. Price d Quantity When the price elasticity of demand of a product is elastic (Ped > 1), then a change in price of a product will...
Words: 513 - Pages: 3
...Elasticities of Demand and Supply Summary Sheet Type of Elasticity | Price Elasticity of Demand (PED) | Income Elasticity of Demand (YED) | Definition | The degree of responsiveness of quantity demanded to a change in price of the good itself, ceteris paribus. | The degree of responsiveness of demand to change in income, ceteris paribus. | Formula | PED = %∆ Qdd / %∆ Price | YED = %∆ Qdd / %∆ Income | Initial change | Price | Income | Effect | Quantity Demanded | Demand | Sign(Significance of the sign) | Negative (Inverse Relationship) | Negative(Inferior Goods) | Positive(Normal Goods) | Range of values | PED>1 | PED<1 | YED<0 | 0 < YED < 1(Basic Necessities) | YED > 1(Luxury Goods) | Elastic/inelastic | Price Elastic | Price Inelastic | - | Income Inelastic | Income Elastic | Factors | * Availability and Closeness of Substitutes * Nature of demand (Luxury, addictive, necessity) * Time Period under consideration * Percentage of income spent on good | * Quality of good * Nature of good e.g. luxury, inferior | Application(Consider application to producers and the government) | * Producers: To increase total revenue * ** Split consumer groups, each have different PED. * Producers should increase price of good if good is price inelastic (no close substitutes). * Producers should decrease price of good or refine its quality if good is price elastic. (many close substitutes). * E.g. The increase in revenue due to the increase...
Words: 809 - Pages: 4
...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...
Words: 844 - Pages: 4
...quality or price are difficult to observe in advance, but these characteristics can be ascertained upon consumption. The concept is originally due to Philip Nelson, who contrasted an experience good with asearch good. Experience goods pose difficulties for consumers in accurately making consumption choices. In service areas, such as healthcare, they reward reputation and create inertia. Experience goods typically have lower price elasticity than search goods, as consumers fear that lower prices may be due to unobservable problems or quality issues. Post-experience goods, also called credence goods, are goods for which it is difficult for consumers to ascertain the quality even after they have consumed them, such as vitamin supplements. Potential consumers of these goods may require third-party information, provided by private rating agencies or government bodies. 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 (ceteris paribus, i.e. 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...
Words: 350 - Pages: 2
...The price of gasoline has a close relationship with the price of oil. According to Wikipedia, Crude oil is the primary raw material used to produce gasoline and from the mid 1980s to 2003 the price of a barrel of oil was generally under $25. In 2003 the price reached $30 per barrel and by 2005 was up to $60. It peaked in 2008 at almost $150 per barrel and has been causing great economic hardship for societies across the globe. There are several reasons for the increase such as declines in petroleum reserves, tension in the Middle-East and oil price speculation. (Wikipedia.com) The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of twelve developing countries including Saudi Arabia, Nigeria and Venezuela, who pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. It secures a steady income for its members while ensuring an efficient and reliable supply of petroleum to consuming nations and a fair return for investors in the petroleum industry. OPEC’s influence has been criticized since it became effective in determining production and prices. (Wikipedia) Even though this paper focuses on gasoline prices, it is impossible for me to speak about gas and not also mention oil. Economies around the world are very dependent on oil which is vital to providing petroleum for motor vehicles as well as generating electricity. A decade ago...
Words: 2039 - Pages: 9
...Q1: A: Demand increases B: Demand falls C: Let A and B be substitute goods. If the price of A increases, the quantity demanded of A decreases (law of demand). Because consumers can easily buy good B instead of good A, they will purchase more of good B (because good A is more expensive) and hence the demand for good B will increase. D: If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in Q2: Total Revenue is TR=P*Q= (600 - 4Q)*Q Marginal Revenue is MR=dTR/dQ= 600-8Q When MR=0 600-8Q=0 Then Q=75 so P=600-4*75= 300 so Price is 300 which TR is maximized. Ed= (ΔQ/ΔP )* (P/Q)=-4*(100/125)= - 3.2 * If |PED| > 1 then Demand is Price Elastic (Demand is sensitive to price changes) * If |PED| = 1 then Demand is Unit Elastic * If |PED| < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes) Ignore the negative sign Revenue is maximized when price is set so that the Price elasticity of demand (PED) is exactly one. When Ed=1, P/Q=0.25 so P=35 Income elasticity of demand measures the responsiveness of demand to changes in the consumer income: is Ei =(ΔQ/ΔI )* (I/Q) Q3: A: False. Since plastic surgery is price inelastic, which means the demand is not sensitive to the price changes. B: False. Since plastic surgery is price inelastic, |PED| =|(ΔQ/Q)/( ΔP/P)|< 1, which means the percentage change in the price...
Words: 632 - Pages: 3
