Price Elasticity of Demand

Price Elasticity

Measures the relative responsiveness of the change in quantity demanded as a result of a change in the product’s price

PED = % ∆ quantity demanded% ∆ in price

Characteristic of Elastic Products Demand is very responsive to price change Usually luxury items (wants); Not

necessities (needs) Many substitutes for the product;

Consumers have a variety of choices Takes up large part of budget (sometimes) Long run demand – more time to react to

price changes

Characteristics of Inelastic Products

Demand is not very responsive to price change

These are items of necessity that do not have many substitutes

Tend to take up less of the budget than elastic goods.

Short run demand – less time to react to price changes

Price Elastic or Inelastic?

PED = % ∆ quantity demanded% ∆ in price

If price elasticity is GREATER than 1, then it is classified as being price elastic.

>1= price elastic If price elasticity is LESS than 1, then it is

classified as being inelastic. < 1 = price inelastic

Example

If the price of a car wash increased 10 percent and the quantity demanded decreased 20 percent, the elasticity would be:

Price Elasticity = 20% = 2 10%

2 > 1, so the demand for a car wash is price elastic

TOTAL REVENUE

Total Revenue (TR)=Price x Quantity Sold

Total Revenue and Elasticity

IF price and TR = Elastic Demand

If price and TR = Elastic Demand

If price and TR = Inelastic Demand

If price and TR = Inelastic Demand