Elasticity and Its application

-Price elasticity of demand

Ran
Elasticity
Activity: Elasticity

What does Elasticity mean in Economics?

Elasticity

Definition:

A measure of how much buyers and sellers

respond to changes in market conditions
 What we learn:
1. Price elasticity of demand

2. Formula: Calculation

3. The value of price elasticity of demand

4. The variety of demand curve

5. Factors affecting price elasticity of demand

6. Application: Total Revenue

The price elasticity of demand

Definition of PED:

It is a measure of how much the quantity

demanded of a good responds to a change in the
price of that good.
The price Elasticity of Demand

 Formula of elasticity coefficients : Should be negative'-',

but ignore this here!

Percentage Change
in Quantity Demanded
Price Elasticity of Demand=
Percentage Change
in Price
Practice

 a. What is the price elasticity of demand over the price range of

$12 to $10?________

 b. What is the price elasticity of demand over the price range of

$10 to $8?_________
Practice

 a. What is the price elasticity of demand over the price range of

$10 to $12?________

 b. What is the price elasticity of demand over the price range of

$8 to $10?_________
The Midpoint Method: regardless of the direction of
change
The Midpoint Method: regardless of the direction of
change
The value of price elasticity of demand
The value of price elasticity of demand

 Iflet you define a number to classify Elastic or

Inelastic, what the number should be?
The value of price elasticity of demand

 1.(Relative)
elastic demand: Quantity demanded
does respond strongly to Price changes
The value of price elasticity of demand

 2.(Relative) inelastic demand: Quantity

demanded does NOT respond strongly to
Price changes
The value of price elasticity of demand

Question:

What about some special values of PED?

1? 0? Infinity（∞）?
The value of price elasticity of demand

 3.Unitary elasticity: PED=1

Quantity demanded changes by the same

percentage as the price.
The value of price elasticity of demand

 4.Perfectly inelastic demand:

Quantity demanded does not respond to price

changes.
The value of price elasticity of demand

 5.Perfectly elastic demand:

Quantity demanded does respond to price

changes to zero.
The variety of demand curve

Thinking: Which is the elastic demand curve

and inelastic demand curve? How to approve
your answer?
price

Steep（陡峭）?
or
Flat （平坦）?

D2
D1

quantity
The variety of demand curve
The variety of demand curve
Factors affecting price elasticity of demand

Question:

1. Which goods in your life are relatively elastic? Make a

list and show your reasons

2. Which goods in your life are relatively inelastic? Make a

list and show your reasons
Factors affecting price elasticity of demand

(1) The availability of Substitutes

(2) Degree of necessity

(3) Proportion of income spent on a product

(4) Time period

Factors affecting price elasticity of demand

(1) The availability of Substitutes

Goods that have lots of close

substitutes: Elastic demand

Goods that have few or no real

substitutes: Inelastic demand
Factors affecting price elasticity of demand
(2) Degree of necessity
Factors affecting price elasticity of demand
(2) Degree of necessity
Factors affecting price elasticity of demand
(2) Degree of necessity
Factors affecting price elasticity of demand
(2) Degree of necessity

Necessity= Essential to consumers, like food, water,

etc., will have Inelastic demand

Luxury=Not Essential to consumers, like bag, boats,

etc., will have Elastic demand
Factors affecting price elasticity of demand

(3) Proportion of income spent on a product

Factors affecting price elasticity of demand

(3) Proportion of income spent on a product

Spent a large proportion of income: Elastic

Spent a small proportion of income: Inelastic

Factors affecting price elasticity of demand

(4) Time period

Long run/time: Elastic demand

Short run/time: Inelastic demand

Practice:

Determine whether the demand for the following

items is price elastic or inelastic.

1. Salt ________________ Why?

2. New cars ____________ Why?

3. Pork _______________ Why?

4. European vacation trip ______________ Why?

5. Insulin_______________________ Why?
Case Study 1

Case: If your company are losing money, what is the solution

as a CEO?
Raise the product's price to make more profit? or else?
Solution 1: raising the price.
Solution 2: reducing the price

Raise or Reduce? How do you decide for the solution?

The Elasticity of a Linear Demand
Curve
 Question:
1. Complete the blank(TR) in the table
2. Draw the Demand Curve according to
the data
3. Draw the Total Revenue Curve
according to the data
4. What conclusions?
The Elasticity of a Linear Demand
Curve

 Question:

What about the elasticity of a linear demand

curve?
The Elasticity of a Linear Demand Curve
Price elasticity and firms
Price elasticity and firms
 Practice: Complete the table

Price elasticity Value of elasticity Price change Effect on TR

‹1 Decrease

Inelastic Rise

Elastic Decrease

›1 Fall
Price elasticity and firms

To conclude, if firms know the value of price

elasticity for their products, they can predict the
effect on total revenue of any price changes
they make