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    Chapter 11 Price Elasticity of Demand

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    Dhrisha Gada
    The document discusses price elasticity of demand, which measures the responsiveness of demand to price changes. Demand is price elastic if it changes by a greater percentage than the price change, and inelastic if demand changes by a smaller percentage. Producers can maximize revenue by charging high prices for inelastic goods and low prices for elastic goods. Factors like availability of substitutes, proportion of income spent, necessity vs luxury, and addictive properties determine whether demand is elastic or inelastic.

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    Chapter 11 Price Elasticity of Demand

    Uploaded by

    Dhrisha Gada
    76 views5 pages
    The document discusses price elasticity of demand, which measures the responsiveness of demand to price changes. Demand is price elastic if it changes by a greater percentage than the price change, and inelastic if demand changes by a smaller percentage. Producers can maximize revenue by charging high prices for inelastic goods and low prices for elastic goods. Factors like availability of substitutes, proportion of income spent, necessity vs luxury, and addictive properties determine whether demand is elastic or inelastic.

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    The document discusses price elasticity of demand, which measures the responsiveness of demand to price changes. Demand is price elastic if it changes by a greater percentage than the price change, and inelastic if demand changes by a smaller percentage. Producers can maximize revenue by charging high prices for inelastic goods and low prices for elastic goods. Factors like availability of substitutes, proportion of income spent, necessity vs luxury, and addictive properties determine whether demand is elastic or inelastic.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    76 views5 pages

    Chapter 11 Price Elasticity of Demand

    Uploaded by

    Dhrisha Gada
    The document discusses price elasticity of demand, which measures the responsiveness of demand to price changes. Demand is price elastic if it changes by a greater percentage than the price change, and inelastic if demand changes by a smaller percentage. Producers can maximize revenue by charging high prices for inelastic goods and low prices for elastic goods. Factors like availability of substitutes, proportion of income spent, necessity vs luxury, and addictive properties determine whether demand is elastic or inelastic.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Price Elasticity Of Demand

    Price Elasticity of Demand is a numerical measure of the responsiveness of


    demand to a change in its price.

    The formula used to calculate (PED) is:

    Q1 = Old Quantity
    Q2 = New Quantity
    P1 = Old Price
    P2 = New Price

    If the answer using the above formula is less than 1 than the product has price
    inelastic demand
    however, if the answer is greater than 1 than the product has price elastic

    Price Elastic Demand: When demand changes by a greater percentage than the
    changes in price.
    Price Inelastic Demand: When demand changes by a smaller percentage than
    the changes in price.

    Revenue Maximization by Using Price Elasticity Of Demand:

    Revenue: Total reward of producing goods and services.

    Formula:

     Price/unit × Quantity produced /demanded


     Total cost + Total profit

    The above diagrams show that:


    If demand is inelastic, producers must charge high prices in order to maximize
    revenue.
    If demand is elastic, producers must charge low price in order to maximize
    revenue.

    Degrees of Price Elasticity Of Demand


    Factors Affecting Price Elasticity of Demand: (SPLANT)

     Substitutes- If a product has many close substitutes, it is likely to have


    elastic demand. A rise in price will cause consumers to switch to the
    cheaper substitute causing a fall in quantity demanded. If there are no
    close substitutes available demand will be inelastic.

     Proportion of Income Spent – If a product takes a large proportion of


    income, the product will have elastic demand. If a product takes a small
    proportion of income, demand will be inelastic.

     Luxuries and Necessities – Luxury products have elastic demand eg.


    Cars, jewellery. Necessities have inelastic demand as people will not cut
    back on their use if price rises. Eg salt.

     Addictive- If the product is an addictive which means it is habit forming,


    eg. Cigarettes, coffee they will have inelastic demand.

     Narrowly Defined- If a product is narrowly defined, it will have many


    substitutes and demand will be elastic. On the other hand, products which
    are broadly defined have inelastic demand.
     Time Period- If the consumer has more time to buy the product, demand
    will be elastic as consumers can postpone their purchase to buy at lower
    price. If consumers have less time to purchase the product, the want has
    to be satisfied urgently, demand will be inelastic.
     Urgency of wants- Demand is inelastic when goods are urgently needed
    whereas demand is elastic when there is no urgency of wants, cosumers
    have time to buy the product
     Income level- Elasticity of demand for any commodity is generally
    inelastic for high income groups compared to low income groups. This
    occurs as rich people are not influenced much by changes in the price of
    goods, as compared to the poor, whose demand for goods will be highly
    elastic.

    Summary of Factors affecting PED


    Availability of Substitutes:
    Substitutes more available PED will be elastic

    Less substitutes available PED will be in elastic

    Proportion of Income Spent:


    Small proportion (e.g. salt) PED will be inelastic

    Large proportion (e.g. car) PED will be elastic

    Nature of Product:
    Need (e.g. bread) PED will be inelastic

    Luxuries (e.g. car) PED will be elastic

    Addictive / Habit forming:


    Cigarettes are addictive thus it will have inelastic PED.

    Fashion and Trend:


    In fashion PED will be elastic

    Out of fashion PED will be inelastic

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