RESPONSIVENESS OF QUANTITY TO PRICE

1
RESPONSIVENESS OF QUANTITY TO PRICE
2
RESPONSIVENESS OF QUANTITY TO PRICE
For the same change in price, quantity demanded
changes more with demand curve D1 than it does
with demand curve D2.
Quantity demanded changes are more responsive to
price changes for the first demand curve.
3
ELASTICITY
The responsiveness of changes in quantity
demanded to changes in price is known as price
elasticity.
The degree of price elasticity of demand can be
measured by the coefficient of price elasticity
of demand.
4
COEFFICIENT OF PRICE ELASTICITY OF DEMAND
Coefficient of price elasticity of demand
Percent Change in Quantity Demanded
Percent Change in Price
5
ARC ELASTICITY
Change in Price Dp 10 - 8 2
PRICE QUANTITY DEMANDED 10 9
8 10
Change in Quantity Demanded DQ 9 - 10
-1
6
ARC ELASTICITY
Change in Price 100Dp/p100(2/10)
20
PRICE QUANTITY DEMANDED 10 9
8 10
Change in Quantity Demanded 100DQ/Q
100(-1/9) -11.1
7
ARC ELASTICITY
Change in Price 100Dp/p100(2/10)
20
Coefficient of Arc Price Elasticity of
Demand 20/(-11.1) 1.8
Change in Quantity Demanded 100DQ/Q
100(-1/9) -11.1
8
ARC ELASTICITY
9
DEFINITION

When the coefficient of price elasticity
of demand is greater than unity, demand is said
to be elastic.

When the coefficient of price elasticity
of demand is less than unity, demand is said to
be inelastic.

When the coefficient of price elasticity
of demand is equal to unity, demand is said to
be unitary elastic.
10
ARC ELASTICITY
Elastic
Elastic
Elastic
Unit Elastic
Inelastic
Inelastic
Inelastic
Inelastic
11
ELASTICITY
12
TOTAL REVENUE
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ELASTICITY AND TOTAL REVENUE

When price falls and demand is elastic
total revenue rises.

When price falls and demand is inelastic
total revenue falls.

When demand is unit elastic total revenue
is maximum.
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DETERMINANTS OFELASTICITY
Price Elasticity of Demand will be greater
(1) the greater the number of close substitutes
(2) the less necessary the good
(3) the smaller the spending on the good is as a
proportion of the total budget
(4) the more narrow the market
(5) the longer the time horizon.
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ARC ELASTICITY
Consider the following two points on a
demand curve
When price changes from 10 to 8, DQ /
Dp(4/16)/(-2/10)1.25.
P Q 10 16 8 20
When price changes from 8 to 10, DQ /
Dp(-4/20)/(2/8)0.8.
Therefore, demand is either elastic or
inelastic depending on the direction of the price
change.
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THE MIDPOINTS FORMULA
The fact that different elasticities can be
obtained according to the direction of movement
on the same portion of the demand curve is
troublesome.
One way of avoiding this contradiction is to use
the midpoints formula.
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THE MIDPOINTS FORMULA
Instead of using the starting price and quantity
to calculate the percent changes, the
midpoints formula uses the midpoint between the
starting and ending prices and quantities.
P Q 10 16 8 20
price midpoint
quantity midpoint
18
9
18
THE MIDPOINTS FORMULA
P Q 10 16 8 20
Using the midpoints to calculate percentage
changes
9 18
When price changes from 10 to 8, DQ /
Dp(4/18)/(-2/9)1.
When price changes from 8 to 10, DQ /
Dp(-4/18)/(2/9)1.
Therefore using the midpoints of the
changes gives the same measure of elasticity.