Chapter 04: Elasticity

Elasticity04McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Price Elasticity of DemandMeasures buyers’ responsiveness to price changesElastic demandSensitive to price changesLarge change in quantityInelastic demandInsensitive to price changesSmall change in quantityLO14-*Price Elasticity of Demand FormulaFormula for price elasticity of demand Ed = LO1Percentage Change in QuantityDemanded of Product XPercentage Change in Priceof Product X4-*Price Elasticity of Demand FormulaUse the midpoint formulaEnsures consistent results Change in quantity Change in price Sum of quantities / 2 Sum of prices / 2LO1Ed =÷4-*Price Elasticity of Demand FormulaUse percentagesUnit free measureCompare responsiveness across productsEliminate the minus signEasier to compare elasticitiesLO14-*Interpretation of Elasticity of Demand Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed 1)Elastic or relatively elasticQd changes by a larger percentage than does priceTotal revenue decreasesTotal revenue increasesEqual to 1(Ed = 1)Unit or unitary elasticQd changes by the same percentage as does priceTotal revenue is unchangedTotal revenue is unchangedLess than 1(Ed 1 supply is elasticEs 0) Negative (Exy 0) Negative (Ei<0)Quantity demanded of the product changes in same direction as change in incomeQuantity demanded of the product changes in opposite direction from change in incomeNormal or superiorInferior4-*