Price elasticity of demand and its application
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This document discusses concepts related to demand and price elasticity of demand. It defines price elasticity of demand as a measure of how much the quantity demanded of a good responds to a change in the price of that good. It identifies factors that influence price elasticity and discusses different types of elasticity including perfectly inelastic, inelastic, unit elastic, elastic, and perfectly elastic demand. It also discusses the relationship between price changes, quantity demanded, and total revenue.
Price elasticity of demand and its application
- 1. Presentation by - Nuzhat Memon Amit Gadekar Abdul Rahman Nilesh Shinde Rashid Hassan Saif Khan
- 2. Demand for a commodity Implies Desire to acquire it. Willingness to pay for it. Ability to pay for it.
- 3. Is a measure of how much buyers and sellers respond to changes in market conditions Allows us to analyze supply and demand with precision.
- 4. Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good
- 5. Ped measures the responsiveness of demand for a product following a change in its own price . 1.The number of close substitutes for a good / uniqueness of the product . 2.The cost of switching between different products . 3.The degree of necessity or whether the good is a luxury. 4.The % of a consumer’s income allocated to spending on the good . 5.Whether the good is subject to habitual consumption . 6.Peak and off-peak demand .
- 6. A company considering a price change must know what effect the change in price will have on total revenue. Generally any change in price will have two effects The Price effect : An increase in unit price will tend to increase revenue a decrease in price will tends to decrease revenue. The Quantity effect : if price increases fewer units are sold; for price decreases more units are sold.
- 7. Identification of objective Determining the nature of goods under consideration Selecting a proper method of forcasting Interpretation of results
- 8. The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
- 9. Example: If the price of an ice cream cone increases from Rs2.00 to Rs2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as
- 10. The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change. he formula used to calculate coefficients of price elasticity of demand for a given product .
- 11. ELASTIC DEMAND Quantity demanded responds strongly to changes in price. Price elasticity of demand is greater than one. INELASTIC DEMAND Quantity demanded does not respond strongly to price changes. Price elasticity of demand is less than one.
- 12. If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes) If PEoD = 1 then Demand is Unit Elastic If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)
- 13. Quantity 100 50 Demand 0 4 5 Price Demand is price elastic
- 14. % change in the price = 10% % change in the quantity = 20% Price Elasticity Of Demand= 10% / 20% = 0.5 The demand is price inelastic because the % change in the demand of 20% is greater than the % change in quantity demanded of 10%. Price of the good Quantity demanded per week Rs 5 100 Rs 4 110
- 15. Perfectly Inelastic Quantity demanded does not respond to price changes. Perfectly Elastic Quantity demanded changes infinitely with any change in price. Unit Elastic Quantity demanded changes by the same percentage as the price.
- 16. Price (a) Perfectly Inelastic Demand: Elasticity Equals 0 0 Quantity 4 5 1. An increase in price . . . Demand 100 2. . . . leaves the quantity demanded unchanged.
- 17. (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 Price 5 90 Demand 1. A 22% increase in price . . . 2. . . . leads to an 11% decrease in quantity demanded. 4 100
- 18. Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 0 Price 2. . . . leads to a 22% decrease in quantity demanded. 4 100 5 80 1. A 22% increase in price . . . Demand
- 19. (d) Elastic Demand: Elasticity Is Greater Than 1 Quantity 0 Price Demand 4 100 5 50 1. A 22% increase in price . . . 2. . . . leads to a 67% decrease in quantity demanded.
- 20. (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly Rs 4, consumers will buy any quantity. 1. At any price above Rs 4, quantity demanded is zero. 3. At a price below Rs 4, quantity demanded is infinite.
- 21. Total revenue is the amount paid by buyers and received by sellers of a good. Computed as the price of the good times the quantity sold. TR = P x Q
- 22. Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Demand Q P P × Q = Rs 400 (revenue) 4 100
- 23. With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.
- 24. Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from Rs 1 to Rs 3… … leads to an Increase in total revenue from RS 100 to Rs 240 Demand Revenue = Rs 100 Revenue = RS 240 Demand $1 100 $3 80
- 25. Cross Price Elasticity of demand measures the responsiveness of demand for a product to a change in the price of other related products. We normally focus on the links between changes in the prices of substitutes and complements . The formula for cross price elasticity of demand Cross Price Elasticity of Demand (CPed) = % change in the demand for Good X % change in the price of Good Y. When there is no relationship between two products, the cross price elasticity of demand is zero.
- 26. The usefulness of price elasticity for producers . Firms can use price elasticity of demand (PED) estimates to predict: The effect of a change in price on the total revenue & expenditure on a product. The likely price volatility in a market following unexpected changes in supply – this is important for commodity producers who may suffer big price movements from time to time. The effect of a change in a government indirect tax on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer. Information on the price elasticity of demand can be used by a business as part of a policy of price discrimination (also known as yield management). This is where a monopoly supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel or yield management by many of our domestic and international airlines.
- 27. The price elasticity of demand can be applied to a variety of problems in which one wants to know the expected change in quantity demanded or revenue given a contemplated change in price. Elasticity is an important concept in understanding the incidence of indirect taxation , distribution of wealth and different types of goods as they relate to the theory of consumer choice . Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus , producer surplus , or government surplus .
- 28. Managerial Ecnomics By Atmanand www.res.org.uk www.Economics .about.com www.smartgrowth.org www.brad.org
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