Price Elasticity of Demand

1
Price Elasticity of Demand

• Presented by
• Sarah Christman

2
The Elasticity Coefficient

• The coefficient of the price elasticity of demand
  is the percentage change in the quantity demanded
  divided by the percentage change in price.
• This number shows the consumers responsiveness
  or sensitivity to price changes.

3
Types of Elasticity

• Price Elastic Elasticity coefficient greater
  than 1.0
• Price Inelastic Elasticity coefficient is less
  than 1.0
• Unit Elastic Elasticity coefficient equal
• to 1.0

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Price Elasticity and Total Revenue

• Total Revenue Price x Quantity
• If elasticity of demand is elastic, then a price
  decrease will increase TR
• If elasticity of demand is inelastic, then a
  price decrease will decrease TR
• If elasticity of demand is unit elastic, then
  changes in price will have no effect on TR

5
Determinants of Price Elasticity of Demand

• Price elasticity measures consumers sensitivity
  to changes in price.
• Demand is more elastic when
• There are several substitutes available
• The larger the amount of their budget spent on
  the product
• The more time consumers have to adjust to the
  price change.

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Examples of Elasticity

• Newspapers .10
• Eggs .32
• Gasoline .60
• Movies .87
• Beef 1.27
• Residential Land 1.60
• Milk .63
• Shoes .91

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Applications of Price Elasticity

• Elasticity of Farm Products .20-.25
• Increase output tends to depress prices of farm
  products
• Because demand is so inelastic, output is
  restricted in order to keep income stable for
  farmers.

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Applications of Elasticity Ctd

• Some argue that legalization of drugs will
  decrease drug trafficking by taking the profit
  out of it.
• Drugs that are cheaply produced, such as crack
  and heroin could be sold much cheaper if made
  legal.
• Cost to addicts would decline, which would
  decrease street crime.

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Applications of Elasticity Ctd

• Opponents of legalizing drugs say that elasticity
  of demand is much greater.
• For casual users may increase consumption at low
  prices, but if prices for illegal drugs are high
  they may substitute with alcohol.
• Some economist predict that legalization of drugs
  would increase consumption by 60