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Price Elasticity of Demand

This document discusses price elasticity of demand and income elasticity of demand. Price elasticity of demand measures how much quantity demanded changes in response to price changes. It is classified as elastic, inelastic, or unitary. Income elasticity measures how quantity demanded changes with income changes. Luxury goods tend to have income elasticity over 1, while necessities have income elasticity between 0 and 1. The document provides formulas to calculate elasticities and interpret their values.

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Reinier alborque
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27 views12 pages

Price Elasticity of Demand

This document discusses price elasticity of demand and income elasticity of demand. Price elasticity of demand measures how much quantity demanded changes in response to price changes. It is classified as elastic, inelastic, or unitary. Income elasticity measures how quantity demanded changes with income changes. Luxury goods tend to have income elasticity over 1, while necessities have income elasticity between 0 and 1. The document provides formulas to calculate elasticities and interpret their values.

Uploaded by

Reinier alborque
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Price elasticity of

demand
Elasticity
Measures the responsiveness
of demand to a change in a
relevant variable- such as
price or income.
Price Elasticity of Demand
Measures the extent to which
the quantity of product
demanded changes in
response to a change in price
Price Elasticity of Demand
Price Elasticity of Demand = 

Percentage in Quantity Demand


Percentage Change in Price 
Price Elasticity of Demand
VALUE OF PED INTERPRETING THE
ELASTICITY

Price Elastic More than 1 Chang in demand is more


than the change in price

Price Inelastic Less than 1 Change in demand is less


than the change in price

Unitary Price elasticity Exactly=1 Change in demand =


change in price
Importance of Price Elasticity of
Demand
• If PED >1 (price elastic) then a change in
price will cause a larger change in demand
- Overall revenues would increase with a
price cut
- Overall revenues would fall with a price
increase
• Opposite is the case if PED <1 (price
inelastic)
Income elasticity
of demand
Income Elasticity of Demand
•Income elasticity of demand
measures the extent to which
the quantity of a product
demanded is affected by a
change in income
Income Elasticity of Demand
Income elasticity of demand=

 Percentage Change in Demand


Percentage Change in Income
Price Elasticity of Demand
Luxuries Necessities
Income elasticity more than 1 Income elasticity less than 1,
but more than 0

As income grows, As income grows,


proportionally more is spent on proportionally less is spent on
luxuries necessities
Examples: Consumer goods, Expensive Examples: Staple Groceries (e.g milk),
holidays, Branded goods Own-label goods
Interpreting of Price Elasticity of
Demand
• Most normal products
- A rise in consumer income will result in a
rise in demand
- A fall in consumer income will result in a
fall in demand
• Extent of the change (elasticity)
-This will vary depending on the type of
product (e.g. luxury v necessity)

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