Elasticity: a Measure of Responsiveness

In: Science

Submitted By katherineabond
Words 6227
Pages 25
4
Elasticity: A Measure of Responsiveness
Chapter Summary
This chapter explored the numbers behind the laws of demand and supply. The law of demand tells us that an increase in price decreases the quantity demanded, ceteris paribus. If we know the price elasticity of demand for a particular product, we can determine just how much less of it will be purchased at the higher price. Similarly, if we know the price elasticity of supply for a product, we can determine just how much more of it will be supplied at a higher price. Here are the main points of the chapter: • The price elasticity of demand—defined as the percentage change in quantity demanded divided by the percentage change in price—measures the responsiveness of consumers to changes in price. • Demand is relatively elastic if there are good substitutes. • If demand is elastic, the relationship between price and total revenue is negative. If demand is inelastic, the relationship between price and total revenue is positive. • The price elasticity of supply—defined as the percentage change in quantity supplied divided by the percentage change in price—measures the responsiveness of producers to changes in price. • If we know the elasticities of demand and supply, we can predict the percentage change in price resulting from a change in demand or supply.

Applying the Concepts
After reading this chapter, you should be able to answer these four key questions: 1. How does the price elasticity of demand vary over time? 2. How does an increase in price affect total expenditures? 3. Where do I find estimates of elasticities of demand? 4. How does a change in demand affect the equilibrium price in the short run and long run?

4.1 The Price Elasticity of Demand
The price elasticity of demand measures the responsiveness of the quantity demanded to changes in price. It is equal to the absolute value of the…...

Similar Documents

Elasticity

... sensitivity. An inelastic demand suggests that consumers are not particularly sensitive to price. Definition of elasticity (): = (% change in Q) / (% change in p) = (Q / Q) / (p / p) If is less than 1, then inelastic; if is greater than 1, then elastic; and if = 1 then unitary elastic. Consider the following examples. Let demand be given by the following demand curve: = (% change in Q) / (% change in p) which gives = (Q / Q) / (p / p) . If price increases from 6 to 8 then = (2/4) / (2/6) = .5 / .33 = 3/2 = 1.5, which is elastic. If price increases from 2 to 4 then = (2/8) / (2/2) = .25/1 = .25 or inelastic. If the price rises from 0 to 1, then = (1/10) / (1/0) = (1/10)(0/1) = 0 or perfectly inelastic If the price falls from 10 to 9, then = (1/0) / (1/10) = (1/0) (10/1) = infinity or infinitely elastic. An example of a perfectly inelastic demand curve (with = 0): Price INELASTIC (like the letter I) Demand Quantity This demand curve has an elasticity of = 0 because the change in quantity is zero. An example of an infinitely elastic demand curve (with = infinity): Price ELASTIC Demand Quantity This demand curve has an elasticity of = infinity because the change in price is zero. Various factors affect the elasticity of demand. 1) Necessity vs. luxuries The elasticity of demand for a luxury...

Words: 2064 - Pages: 9

Elasticity: a Measure of Responsiveness

...4 Elasticity: A Measure of Responsiveness Chapter Summary This chapter explored the numbers behind the laws of demand and supply. The law of demand tells us that an increase in price decreases the quantity demanded, ceteris paribus. If we know the price elasticity of demand for a particular product, we can determine just how much less of it will be purchased at the higher price. Similarly, if we know the price elasticity of supply for a product, we can determine just how much more of it will be supplied at a higher price. Here are the main points of the chapter: • The price elasticity of demand—defined as the percentage change in quantity demanded divided by the percentage change in price—measures the responsiveness of consumers to changes in price. • Demand is relatively elastic if there are good substitutes. • If demand is elastic, the relationship between price and total revenue is negative. If demand is inelastic, the relationship between price and total revenue is positive. • The price elasticity of supply—defined as the percentage change in quantity supplied divided by the percentage change in price—measures the responsiveness of producers to changes in price. • If we know the elasticities of demand and supply, we can predict the percentage change in price resulting from a change in demand or supply. Applying the Concepts After reading this chapter, you should be able to answer these four key questions: 1. How does the price elasticity of demand vary over time...

Words: 6227 - Pages: 25

Elasticity

...Elasticity Elasticity is a central concept in economics discussed frequently in weeks one and two, and figures to play a prominent role in economic discussions throughout the course. In economics, elasticity describes a product or good’s demand with respect to its price set by the supplier. An elastic product is a product whose consumer demand is dependent on the price of the product. An example would be, as the price of lawn care increases, the overall demand from the consumer base that uses those services would decrease. Conversely, an in-elastic good is one whose demand is not greatly affected by a change in its price. Cigarettes and alcohol are perfect examples of in-elastic products. As prices and taxes continue to increase on these products, the general consumer demand continues to remain the same. The economic expression to determine whether a product is elastic or in-elastic is ⋮%ΔD%ΔP⋮. That is, the Price Elasticity of Demand is the absolute value of the percentage change in consumer demand divided by the percentage change in consumer pricing. A good is said to be elastic if the price elasticity of demand is greater than one. Elasticity is a rather simple and straight forward concept when looking at a product in a specific time period. Gasoline is a product is a said to be in-elastic due to consumer demand and dependence on it. That is, if you were to look at a price/demand graph of gasoline during a 6 month period of time, it...

Words: 472 - Pages: 2

Elasticity

...Subject: Elasticity Date: May 1, 2013 Business Brief Opening The article The Double Jeopardy of Sales Promotions assesses market influences that have steered US marketers to increase sales capacities and increase market share through the use of sales promotions (Jones, 1990). This concept was based on theme advertising. Many firms during this time lacked foresight of the expense and the earnings that were forgone while attempting to increase short-term cost. It has been argued that long term promotions reduces future sales by 'bringing forward' sales, and diminishing of the brand. They also promote competitive retaliation; and cheapen the image of the brand in the customer's eyes. Promotions can never improve a brand image or help the stability of the consumer (Jones, 1990). This process actually pushes the firm into a nasty cycle of promotion, commotion, and then demotion. According to the article by using mathematical techniques companies are able to maximize the efficiency of their marketing plan (Jones, 1990). Analysis Knowing Price Elasticity of Demand (PED) helps the company opt whether to raise or lower price, or whether to price differentiate. Price differentiate is when the company charges the consumer different prices for the same product (Jones, 1990). According to Boyes, a good with price elasticity stronger than negative one is said to be "elastic;" goods with price elasticity’s closer to zero are said to be "inelastic" (Boyes, 2008). Goods that...

Words: 502 - Pages: 3

Elasticity

...1. You will need to thoroughly explain elasticity. You are expected to cover issues such as: a. What is it? Elasticity is how the demand or supply curve’s change to a change in the product. Whether it be price, quantity or another factor in the market. There are different elasticity calculations that can be used. Price elasticity of demand is the % change in quantity demanded / % change in price. Price elasticity of supply is the % change in quantity supplied / % change in price. Income elasticity of demand is the % change in demand of a product / % change in the consumer’s income. You are also able to calculate the change in price if a good that is related to your product using the cross-price elasticity of demand. This calculation is % change in demand of your product / % change in the price of a related good. b. Why is it used and why is it important? The elasticity calculations are used to see how your product’s demand reacts to changes in the market. It allows you to analyze your place in the market and lets you make business decisions for what price you want to charge for your product to how much of your product you want to be on the self. Understanding these calculations will help your business succeed. Scenario 2. The current price, paid by businesses, for your widget is $3.00. The current quantity you sell to various businesses is 150,000 per month. You decide to cut the price of your widget from $3.00 to $2.70. You expect that the quantity......

Words: 396 - Pages: 2

Elasticity

...A1. The response to the demand of a product or service following a change in price, sales may increase when a price goes down. Sales may also decrease when the prices goes up. A2. The response or change in demand when the price of either a substitute product or complementary product increases or decreases. If two products are substitutes and the price of one of the substitutes increases we would expect to see purchases increase for the other substitute. In the case of complements as the price rises in one we would expect to see the purchases decrease for both. A3. Income elasticity is the measure of the rate of response of quantity demand due to an increase or decrease in a consumer’s income. For most goods an increase in income creates an increase in demand for items that are considered an indulgence, like name brand clothes, new cars and electronic equipment. Equally the demand for these goods decreases if income decreases. These goods whose demands vary based on income are called superior or normal goods. Most products are considered normal goods, however there are exceptions. When incomes increase to a certain point the demand for used or less popular items like second hand clothes and used cars decreases. These goods that vary inversely with money income are called inferior goods. B. The coefficient for elasticity of demand measures the relationship between two variables. The formula used is percentage in change of quantity /percentage change in price. Q/P...

Words: 1318 - Pages: 6

Elasticity

... average helps to show the data the same over a range. 4. Explain why using the slope of a demand curve alone is not sufficient to measure elasticity. The slope alone doesn’t reflect the elasticity. The elasticity changes along the curve and the percentage changes need to be analyzed. A steeper slope shows us more inelastic demand, while a flatter (horizontal) slope reflects a more elastic demand. 5. Explain the shape of a demand curve that is perfectly inelastic and perfectly elastic. Perfectly inelastic = vertical demand curve, reflecting that a change in price has no change in quantity demanded (ex: insulin) Perfectly elastic = horizontal demand curve, reflecting that a change in price has a VERY LARGE impact on quantity. (ex: silver or copper products from an individual producer). 6. List the determinants of own price elasticity. 1. available lose substitutes – greater # of subs, the more elastic it becomes 2. percent of income – toothpicks versus cars. More spent on an item, more elastic it becomes 3. luxury or necessity – necessities are more inelastic than luxury items 4. time period – the longer the time period, the more elastic a good becomes as more subs avail 5. market definition – broader the definition, the fewer number of subs, mostly inelastic 7. Define cross price elasticity, give the equation, and explain how to determine if goods are substitutes or complements using the cross price elasticity. 8.......

Words: 619 - Pages: 3

Elasticity

... simple equation: Elasticity = (% change in quantity / % change in price) If elasticity is greater than or equal to one, the curve is considered to be >>>>> Elastic If it is less than one, the curve is called >>>>> inelastic . If it equals to one so it’s called >>>>> Unit elastic *Normal goods have a positive income elasticity *Inferior goods have a negative income elasticity *Necessities typically have an income elasticity between 0&1 *Luxuries typically have an income elasticity greater than 1 Price Elasticity of supply :- Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes. The following equation can be used to calculate PES. While the coefficient for PES is positive in value, it may range from 0, perfectly inelastic, to infinite, perfectly elastic. The positive sign reflects the fact that higher prices will act an incentive to supply more. Because the coefficient is greater than one, PES is elastic and the firm is responsive to changes in price. This will give it a competitive advantage over its rivals. Price Elasticity of Demand :- Price elasticity of demand (PED) shows the relationship between price and quantity demanded and provides a precise calculation of the effect of a change in price on quantity demanded.......

Words: 844 - Pages: 4

Elasticity

...Elasticity Paper ECO/365 Elasticity Paper According to Investopedia (2014), Elasticity is defined as, “A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes.” This paper will reflect on a multitude of things such as why some products become substitutes, why some are complements as well as provide examples of each. Substitution The product that our group chose to reflect on in this paper, is a car. There are a multitude of other ways that people commute back in forth besides using a car, some examples include: motorcycle, truck, SUV, bike, train, airplane, and boat. There are different reasons as to why people change the way the commute. Some people have more than one way of which they get around. Motorcycles can be used to get around but most people like to use them on their free time and enjoy the weather when riding them. Trucks and SUV's can be expensive when it comes to gas but are great to use in the winter storms. A bike can save a person a lot of money because they do not have to pay for gas or repairs but really is only used for short distances and exercise. Trains can be used if someone does not own a car or to travel longer distances. Boats/ships are used for cruises for vacations or you can buy a boat for your free time. Airplanes are used for far distance trips or vacations...

Words: 833 - Pages: 4

Elasticity

...Elasticity ECO/325 Elasticity Cross elasticity of demand is a concept from economics which measures the response of demand on product Y when there is a change in price on product X. There are complements products, substitutes products and independent products, a products becomes a substitute when it becomes a replacement, which means that that consumer will use a new product to replace the original one when its price increases. It would also become a substitute when the ordinal good is short on supply or if it becomes very hard to obtain. When goods are substitutes they will always have a positive cross elasticity of demand, this means that as the price of product X goes up the demand on product Y will go up as well, for example we can say that if the price in iPhone keeps going up the demand on Galaxy will also go up since consumer will look for a more affordable smartphone. Another good example is as the price on coffee goes up the demand on tea will also go up since consumer will change to a new and more afortable alternative. There is also complement goods which are product that depend from each other. On complements goods the demand of Y product will increase as the price of X product decreases creating a negative cross elasticity of demand. A good example is the SUV demand and the gas prices, as the price of gas goes down the demand on SUV will go up. It could also work the other way around, as the price on product X goes up the demand on product Y will go......

Words: 349 - Pages: 2

Pshyc Measure

...Psychological Measure Learning Team: B PSY/475 Monday, September 15, 2014 Maureen Clifford Psychological Measure Volunteer Team Member: _Jody_______ Introduction—should include background information on the Measure and the selected articles as well as an overview of the paper Rubric Information: At least two articles that discuss the use of the selected psychological measure in research are summarized. Rubric Information: The introduction provides sufficient background on the topic and previews major points. Article Review The results from the first article supported 4 out of the 5 hypothesis set for this study using the CDI (Fránová, Lukavský, & Preiss, 2008). User Fránová, Lukavský, and Preiss (2008) observed, without the use of the best predictors, the association between other CDI factors and scholastic achievements decreased. The results from the second article shared that a single cutoff score could not be produced or use as a solitary method of predicting depressive disorders. According to Timbremont, Braet, and Dreessen (2004), “This cutoff score is adequate in general screening because it is un-desirable to incorrectly diagnose child problems” (p. 155). Each articles use of the Children’s Depression Inventory concluded that the test was reliable in indicating depressive symptoms in children. Both articles used the Children’s Depression Inventory (CDI) to identify correlations between the inventory and other factors specific to each articles...

Words: 1266 - Pages: 6

Elasticity

...Chapter 4 Elasticity 4.1 Price Elasticity of Demand 1) A price elasticity of demand of 2 means that a 10 percent increase in price will result in a A) 2 percent decrease in quantity demanded. B) 20 percent decrease in quantity demanded. C) 5 percent decrease in quantity demanded. D) 2 percent increase in quantity demanded. E) 20 percent increase in quantity demanded. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand 2) The price elasticity of demand is a units-free measure of the responsiveness of the ________ when all other influences on buying plans remain the same. A) quantity demanded to a change in the price of a substitute or complement B) quantity demanded to a change in income C) quantity demanded of a good to a change in its price D) price to a change in quantity demanded E) none of the above Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Demand 3) The concept used by economists to indicate the responsiveness of the quantity demanded of a good to a change in its price is the A) cross elasticity of demand. B) income elasticity of demand. C) substitute elasticity of demand. D) price elasticity of demand. E) elasticity of supply. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Demand 4) If a 10 percent rise in price leads to an 8 percent decrease in quantity demanded, the price elasticity of demand is A) 0.8. B) 1.25. C) 8. D) 0.125. E) 80. Answer: A Diff: 2 Type: MC Topic...

Words: 11796 - Pages: 48

Elasticity

..., moisturize skin, and reduce razor burn. Razors and shaving cream are complementary products because the price of razors has an inverse correlation with the demand for shaving cream. When the price of razors rises, the demand for shaving cream will decrease. Since the products are complements, this is known as cross elasticity. Cross elasticity occurs when the increased cost of one product creates a decrease in demand for both products (Moffatt, 2015). Shaving cream is not a necessity for shaving so many consumers will forgo the shaving cream if they are paying more for razors. Substitutes A substitute is a product or service that meets the needs or wants of a consumer that another product or service satisfies. In addition, a substitute can be considered an imperfect or perfect substitute whether the substitute is one or the other depends on if the substitute partly or entirely meets the needs or wants of the consumer. For instance, a consumer may consider Stevia to be a perfect substitute for granulated sugar. If however, a consumer believes there is a difference between the two, he or she will believe Stevia to be an imperfect substitute. In order for a product or service to be thought of as a substitute for another good, it must have a relationship with that good. A substitute highly influences the elasticity of a product or service. The more substitutes there are the more elastic the demand will become. So, if the price for granulated sugar increased by......

Words: 729 - Pages: 3

Elasticity

..., and it can be used to measure responses to a change in the price of a good, a change in the price of a related good, or a change in income. Basically, goods said to be price elastic are goods that a change in price will bring about a big change in demand. For example, if the price of latte in Starbucks increases from RM9 to RM10 the demand for latte will decrease because there are cheaper options (substitutes) for that particular coffee such as Americano or any other coffee from different outlet (e.g.; The Coffee Bean) While goods said to be price inelastic are goods that a change in price will barely or not even bring about any change in demand. The best example is fuel, because no matter the change in price and no matter how much people complain, they will still buy it as it is an essential good and they need it (Case & Fair, 1989). Price elasticity of demand Price elasticity of demand describes the size of the change in the quantity demanded of a good or service when its price changes. Another way to think about price elasticity of demand is as a measure of consumers’ sensitivity to price changes. When consumers’ buying decisions are highly influenced by price, we say that their demand curve is more elastic, meaning that a small change in price causes a large change in the quantity demanded. When consumers are not very sensitive to price changes — that is, when they will buy approximately the same quantity, regardless of the price — we say that their demand...

Words: 1746 - Pages: 7

Measure for Measure

...‘Measure for Measure’ in Filipino–because ‘Shakespeare is truly global’ A roundtable meeting is “a venue for intellectual discussion among the academe, students, playwrights, directors, media and anyone interested in theater,” said Jeffrey Hernandez, council master of the University of the Philippines Theater Council. He added: “We have a responsibility to the audience to explain our craft, to touch lives and bring them back to the reality of life. We do art for the people we love, and in a larger sense for the country.” That statement opened the press launch of Dulaang UP’s 39th season, held recently at the Wilfrido Ma. Guerrero Theater in UP Diliman, Quezon City. The theme running through the five plays that will be presented, in Filipino as well as English, until February next year is “Regaining Dignity.” The plays in the season are Shakespeare’s “Measure for Measure/Hakbang sa Hakbang” (with Filipino translation by Ron Capinding), Aug. 20-Sept. 7, directed by DUP artistic director Alexander Cortez; Floy Quintos’ “Ang Huling Lagda ni Apolinario Mabini,” directed by Dexter M. Santos, Oct. 1-19; William Wycherley’s “The Country Wife/Ang Misis kong Promdi,” with Filipino translation by Nicholas B. Pichay, Nov. 19-Dec. 7; and Rody Vera’s “Bilanggo ng Pag-ibig,” inspired by the works of Jean Genet, the novelist-playwright who best exemplified the French spirit of succès de scandale “The Country Wife” will be directed by Tony Mabesa, “Bilanggo ng Pag-ibig” by José...

Words: 9373 - Pages: 38