Price Elasticity of Demand

Intro to Price Elasticity of Demand

• Price Elasticity of Demand = percent change in quantity/percent change in price

• elasticity is when the quantity demanded of a good or service responds to changes in its price, illustrating how consumers adjust their purchasing behavior

• inelasticity is when the quantity demanded changes very little with a change in price, indicating that consumers are less responsive to price fluctuations

• coefficient < 1 = inelastic demand

• coefficient > 1 = elastic demand

Determinants of Price Elasticity of Demand

• Substitutes

  • if there’s more substitutes, then there’s more elasticity

  • if there’s less substitute, there’s more inelasticity

• Timeframe

  • longer time frame = more elasticity

  • shorter time frame = more inelastic

• Income Share

  • high = elastic

  • lower = inelastic

• Luxury vs Necessity

  • necessity = inelastic

    • ex: insulin

  • luxury = elastic

• Narrowness of Market

  • market for apples is relatively elastic due to the availability of substitute fruits

  • market for food would be relatively inelastic compared to apples due to the fact u cannot substitute food

Perfect Inelasticity and Perfect Elasticity of Demand

• coefficient = infinity = perfectly elastic demand

  • horizontal line

  • something that changes a lot as price changes

• coefficient = 0 = perfectly inelastic demand

  • vertical line

  • something that does not change as price changes

Constant Unit Elasticity

• coefficient = 1 = unit elastic demand

• constant unit elasticity represents a situation where the percentage change in quantity demanded is exactly equal to the percentage change in price

• constant unit elasticity indicates that total revenue remains unchanged as prices fluctuate

Total Revenue and Elasticity

• if price and TR are directly proportional, then demand is inelastic

  • if price increases and TR increases, then demand is inelastic

  • ff price decreases and TR decreases, then demand is inelastic

• if price and TR are inversely proportional, then demand is elastic

  • If price increases and TR decreases, then demand is elastic

  • if price decreases and TR increases, then demand is elastic

• If TR remains constant, then demand is unit elastic

  • if price decreases and TR remains constant, then demand is unit elastic

  • if price increases and TR remains constant, then demand is unit elastic