Interpreting Price Elasticity of Demand October 2019 Economics 1 Mr Bernstein What Does the Value of Elasticity Tell Us Example E d ΔQ d ΔP 10 P rises 1 Algebra ID: 928413
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Slide1
Economics 1
Mr. Bernstein
Interpreting
Price Elasticity of Demand
October
2019
Slide2Economics 1
Mr. Bernstein
What Does the Value of Elasticity Tell Us?
Example: Ed = %ΔQd/%ΔP = 10; P rises 1%Algebra: %rQd/1% = 10, so %rQd = 10% fall in QdFor a business, this is a dramatic fall in sales due to a small price increaseElasticity describes the steepness of the demand curveElasticity of zero = “perfectly inelastic” – changes in prices have no impact on quantity demanded (vertical)“Perfectly elastic” – changes in prices have infinitely large impact on quantity demanded (horizontal curve)
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Slide3Economics 1
Mr. Bernstein
Examples of Perfectly Inelastic and Elastic Curves
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Slide4Economics 1
Mr. Bernstein
What Does the Value of Elasticity Tell Us?
In general terms:Inelastic means a steep or steeper curveElastic means a flat or flatter curve4
Slide5Economics 1
Mr. Bernstein
Elasticity and Total Revenue
TR = P x QPrice effect: Raise P, R tends to riseQuantity effect: Raise P, Qd falls, so R tends to fall5
Slide6Economics 1
Mr. Bernstein
Elasticity along the Demand Curve
TR begins to fall as prices rise and Elasticity grows6
Slide7Economics 1
Mr. Bernstein
Determinants of Elasticity
# of SubstitutesMore substitutes, more elasticityLuxury or NecessityMore necessary, less elasticity Example: Insulin vs. BicyclesShare of Income SpentLarger percent of budget, more elasticityAKA Expensive vs. InexpensiveTimeMore time involved, more elasticity7
Slide8Economics 1
Mr. Bernstein
Determinants of Elasticity, cont.
Total Revenue (TR) TestIf TR rises as P rises, demand is inelasticIf TR falls as P falls, demand is inelasticIf TR falls as P rises, demand is elasticIf TR rises as P falls, demand is elasticElasticity Coefficient TestIf Elasticity >1, it is elasticIf Elasticity <1, it is inelastic8