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Price elasticity of demand


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Price elasticity of demand

  1. 1. Price Elasticity of Demand Economics
  2. 2. Price elasticity of demand <ul><li>Measures the relative responsiveness of the change in quantity demanded as a result of a change in the product’s price. </li></ul><ul><li>Price Elasticity of Demand=% Change in Quantity Demanded /Percentage Change in Price </li></ul>
  3. 3. Elastic <ul><li>Elastic implies responsiveness </li></ul><ul><li>Price elastic=the quantity demanded is quite responsive to a change in price </li></ul><ul><li>If the value of a price elasticity is greater than 1 , we classify demand as being price elastic </li></ul>
  4. 4. Inelastic <ul><li>When the quantity demanded is not very sensitive to a change in price, we say that demand is price inelastic </li></ul><ul><li>When a product has an inelastic demand, the percentage change in quantity is less than the percentage change in price. </li></ul><ul><li>The value of price elasticity will be less than 1 </li></ul>
  5. 5. Unitary Price Elasticity <ul><li>The percentage change in quantity demanded exactly equals the percentage change in price </li></ul><ul><li>The calculated value of the price elasticity equals 1 </li></ul>
  6. 6. Measuring Total Revenue <ul><li>The total amount of money a company receives from sales of a product is called Total Revenue </li></ul><ul><li>Total Revenue =(price) x (Quantity sold) </li></ul>
  7. 7. The relationship between price, elasticity, and total revenue Increasing price increases total revenue Increasing price decreases total revenue Inelastic Demand Decreasing price decreases total revenue Elastic Demand Decreasing price increases total revenue
  8. 8. Find the dollar value of total revenue at each of the six prices. At what price will total revenue be the greatest? How many units will sell at that price? <ul><li>Price </li></ul><ul><li>$6 </li></ul><ul><li>5 </li></ul><ul><li>4 </li></ul><ul><li>3 </li></ul><ul><li>2 </li></ul><ul><li>1 </li></ul><ul><li>Quantity </li></ul><ul><li>0 </li></ul><ul><li>1 </li></ul><ul><li>2 </li></ul><ul><li>3 </li></ul><ul><li>4 </li></ul><ul><li>5 </li></ul>