Price elasticity of demand (economics)

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Price elasticity of demand (economics)

  1. 1. The Formula: % Change in quantity demandedPde = __________________________ % Change in Price of the commodityIf answer is between 0 If the answer isand -1: the relationship between -1 and infinity:is inelastic the relationship is elasticNote: PED has (–) sign in front of it because as pricerises.. demand falls and vice-versa (inverse relationship between price and demand)
  2. 2. Slope is normally described by Elasticity is the measurement the ratio of the "rise" divided of how changing one economic by the "run" between two variable affects others. it is the points on a line. ratio of the percentage change in one variable to the percentage change in another variable. Q % Q _____________Slope = ____________ Price Elasticity = P % P
  3. 3. 1. Perfectly Elastic Product (Ped = ∞)2. Perfect Inelastic Product (Ped = 0)3. Elastic Product (1 < Ped< ∞)4.Inelastic Product (0 < Ped< 1)5. Unitary Elastic Product (Ped = 1)
  4. 4. Perfectly Elastic DemandA perfectly elasticdemand is one whosdemand curve is aperfectly horizontalline. This means thatat the same price forthe item, the consumeris willing to buy moreand more even at thatsame price.
  5. 5. Perfectly Inelastic DemandWhen a price changehas no effect on thesupply and demand of agood or service, it isconsidered perfectlyinelastic. An example ofperfectly inelastic demandwould be a life savingdrug that people will payany price to obtain. Evenif the price of the drugwere to increasedramatically, the quantitydemanded would remainthe same.
  6. 6. Elastic DemandElastic demand means thatdemand for a product issensitive to price changes.For example, if the sellingprice of a product isincreased, there will befewer units sold. If theselling price of a productdecreases, there will be anincrease in the number ofunits sold. Elastic demandis also referred to as theprice elasticity of demand.
  7. 7. Inelastic DemandA situation in whichthe demand for a product doesnot increase or decreasecorrespondingly with a fall orrise in its price. Fromthe suppliers viewpoint, this isa highly desirable situationbecause price and totalrevenue are directly related; anincrease in price increases totalrevenue despite a fall inthe quantity demanded.
  8. 8. Unitary DemandA unitary elasticproduct is one in whichfor a certain amount ofchange in price, there isthe same amount ofchange in sales. Hence, ifI raise the price of aproduct by 5%, then therecorded fall in sales willbe exactly 5% and viceversa.

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