U2 M46 Elasticity

What is price elasticity of demand?

Measurement of consumers responsiveness to a change in price.

Usages of price elasticity of demand

• Used by firms to help determine prices and sales

• Used by the government to decide how to tax

What is inelastic demand?

Quantity is insensitive to a change in price

Characteristics of products with inelastic demand

few substitutes

necessities

small portion of income

required now, rather than later

elasticity coefficient less than 1(steep curve)

Price Elasticity Formula

percent change in quantity demanded/percent change in price

What is elastic demand?

Quantity is sensitive to a change in price

Characteristics of products with elastic demand

many substitutes

luxuries

large portion of income

plenty of time to decide

elasticity coefficient greater than 1 (Elastic Demand curve is Flat)

Total Revenue =

Price * Quantity

Under inelastic demand what happens to total revenue as price changes?

Price increase causes TR to increase

Price decrease causes TR to decrease

Under elastic demand what happens to total revenue as price changes?

Price increase causes TR to decrease

Price decrease causes TR to increase

Under unit elastic demand what happens to total revenue as price changes?

Price changes but TR remains unchanged

What type of elasticity describes this image?

Perfectly Inelastic

What type of elasticity describes this image?

Relatively Inelastic

What type of elasticity describes this image?

Unit Elastic

What type of elasticity describes this image?

Relatively Elastic

What type of elasticity describes this image?

Perfectly Elastic (don’t exist irl)

Midpoint Formula for Elasticity of Demand

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