new price elasticity

8/11/2019 New Price Elasticity

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Price elasticity

In this case, the two key words are 'price' and 'demand', so the price elasticity ofdemand measures the responsiveness of the quantity demanded to a given

price change.Note - Price elasticity of demand is generally known as elasticity of demand .There isno difference between price elasticity of demand and elasticity of demand. By theterm elasticity of demand, we generally refer to price elasticity of demand;because, price of a commodity is the most important factor that affects its demand.

The demand elasticity formula calculates the impact of a change in price for a givenproduct on demand. The law of demand merely explains the qualitative relationshipwhile the concept of elasticity of demand analyses the quantitative price-demand

relationship.

Price elasticity of demand (e p) = Percentage change in quantity demanded /Percentage change in price

Symbolically,

Ed = %change in quantity demanded

% change in price

PED = (Q/Q)/(P/P) ; Alternatively PED = (Q/Q) (P/P)

By rearranging PED = (Q/P) (P/Q)

Illustration 1:

The percentage decrease in the price of the commodity is 25% and the percentageincrease in the quantity demanded is 50%.

Hence,

ep = 50%/-25% = -2

Note that the price elasticity is always negative because of the inverse relationshipbetween price and quantity demanded (law of demand). However, as a conventionalway, we ignore the negative sign when calculating the price elasticity.

Illustration 2:

(a) When the price of oranges is $5, the quantity demanded is 20 KGs.


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(b) When the price of oranges is $4, the quantity demanded is 24 KGs.

Thus, P = 5, Q = 20; P = 1, Q = 4

ep = (Q/P) (P/Q) = (4/1) (5/20) = 1

Note - Instead of the term percentage change, we can use the term proportionatechange also.

Therefore,

ep = Proportionate change in quantity demanded / Proportionate change in price

Understanding Elastic and Inelastic

Price Elastic Demand:

Definition: Demand is price elastic if a change in price leads to a bigger % change indemand; therefore the PED will therefore be greater than 1.

Elastic Demand PED >1 Perfectly Elastic PED =

Goods which are elastic tend to have some or all of the following characteristics.

1. They are luxury goods, e.g. sports cars2. They are expensive and a big % of income e.g. sports cars and holidays

3. Goods with many substitutes and a very competitive market. E.g. if Sainsburys putup the price of its bread there are many alternatives, so people would be pricesensitive.Price Inelastic Demand

These are goods where a change in price leads to a smaller % change in demand;therefore PED


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Inelastic demand PED


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Numerical

ValueTerminology Description

Shape ofthe

DemandCurve

Examples

1. PriceElasticity =

Perfectly elastic

A consumerwill buy all the

quantity ofthe

commodity atthis price andnothing else

at some otherprice.

Horizontal --

2. PriceElasticity = 0

Perfectlyinelastic

Demandremains

unchangedwhatever be

the change inprice

Vertical Medicines

3. PriceElasticity = 1

Unitary elastic% Q = %

P Rectangularhyperbola

--

4. 0 < PriceElasticity < 1

Inelastic% Q < %

P Flatter

Essentialgoods

5. > PriceElasticity > 1

Elastic% Q > %

P Steeper

Luxuriesand

comforts

Percentage change in quantity demanded divided by percentage changein price.The percentage of change in quantity demanded is: [QDemand(NEW) -QDemand(OLD)] / QDemand(OLD)The percentage of change in price is: [Price(NEW) - Price(OLD)] /

Price(OLD)


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new price elasticity

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