ECON-COURSEWAREELASTICITY OF DEMAND

Grades: 10 & 11

Group Members:

Carey Crosdale

Natasha Lancaster-Collins

Marsha McKenzie

THE MICO UNIVERSITY

Content

Definition of Elasticity of Demand

Price Elasticity

Income Elasticity

Cross Elasticity

Summary

Test

End-Exit

The degree to which goods and services varies with its price;

sales increase – drop in prices and decrease with rise in prices, eg. Appliances car etc.

Elasticity of Demand

Types of Elasticities

Price Elasticity of demand (PED) – measure

responsiveness, or elasticity, of the quantity demanded

of a good or service to a change in its price.

it gives the percentage change in quantity demanded in

response to percent change in price.

Price Elasticity Demand Curve

PED is derived from the percentage change in quantity (%ΔQd) and percentage change in price (%ΔP).

Income Elasticity

Income elasticity of demand measures the

relationship between a change in quantity

demanded and a change in income. Eg, household income & purchasing power Percentage change in quantity demanded of good

X divided by the percentage change in real consumers' income

Positive Income Elasticity

Perfectly Elastic Demand Curve

Perfectly Elastic – It is traced when, a small changes in price leads to a very substantial change in quantity of demand. It is numerically defined as Ep=α. Curve is parallel to X-axis of perfectly elastic

Cross Elasticity of Demand

Cross Elasticity measures the responsiveness of the demand for a good to a change in the price of another good.

It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good.

Formula

Relatively Elastic Curve

If proportionate change in quantity demanded is great than the proportionate change is price then, relatively elastic is greater than 1. We can indicate it as EP>1. We can say a small change in price leads to a big change in quantity demanded. In the case of increase or decrease we can say demand is relatively elastic.

S1

S2

Q2Q1

P1

P2

Quantity Q

Summary Elasticity refers to the reaction or response of the consumers to change in

prices of goods and services. Elasticity of demand also may depend on the relative change in quantity and price. Buyers may tend to reduce their purchases as price increases, and tend to increase their purchases when price decreases.

The change in price is not the only factor that may change the reaction of consumers. The nature of the product (similarity to what he uses) and the particular needs of the consumer (whether important or not) may also affect the change in the reaction or response of consumer.

Demand may be elastic or inelastic. Demand is likely to be elastic when: want is not urgent, close substitutes are available, goods is durable or repairable, goods has multiple uses. On the other hand, demand is likely to be inelastic when: want is urgent, good substitutes are unavailable, wanted jointly with some complementary item.

QUESTION

1. Refer to the graphs below. Which demand curve has a value of elasticity equal to zero?

The graph on the left.

The graph on the right.

Both graphs.

Neither graph.

Cont’d- Questions

2. Refer to the graph below. This demand curve is perfectly elastic because:

Quantity demanded is fixed at 20 units.

Price does not change, regardless of quantity demanded.

An infinitesimal increase in price above $5 brings quantity demanded down to zero.

All of the above.

Reference

http://www.ecoteacher.asn.au/Demand/elastsli/e1.htm

http://www.investorwords.com/1396/demand.html

http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm

THE END