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![COMPUTING THE PRICE
ELASTICITY OF DEMAND USING
THE MIDPOINT FORMULA
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.
)/2]P)/[(PP(P
)/2]Q)/[(QQ(Q
=DemandofElasticityPrice
1212
1212
](https://image.slidesharecdn.com/elasticityanditsapplication-111222213041-phpapp02-200122173606/75/Elasticity-and-its-application-9-2048.jpg)
![Computing
the Price
Elasticity of
Demand
Example: If the price of an ice cream cone increases from $2.00 to $2.20
and the amount you buy falls from 10 to 8 cones the your elasticity of
demand, using the midpoint formula, would be calculated as:
32.2
5.9
22
2/)20.200.2(
)00.220.2(
2/)810(
)810(
percent
percent
)/2]P)/[(PP(P
)/2]Q)/[(QQ(Q
=DemandofElasticityPrice
1212
1212
](https://image.slidesharecdn.com/elasticityanditsapplication-111222213041-phpapp02-200122173606/75/Elasticity-and-its-application-11-2048.jpg)
Uploaded byKhalid Aziz
Elasticity and its application
Elasticity is a measure of how responsive buyers and sellers are to changes in price and other market conditions. Price elasticity of demand specifically measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Demand can be perfectly inelastic, inelastic, unit elastic, or elastic depending on whether the quantity changes less than, equal to, or more than the price change. Determinants of price elasticity include whether a good is a necessity vs luxury and the availability of substitutes. Income elasticity measures responsiveness of demand to income changes.
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Elasticity and its application
- 1.
- 3. Elasticity . .. … is a measure of how much buyers and sellers respond to changes in market conditions … allows us to analyze supply and demand with greater precision. Journal Question-Name 3 necessities and 3 luxuries that you would buy.
- 4. Price Elasticity ofDemand Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
- 5. Computing the Price Elasticity of Demand Theprice elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price Elasticity = Percentage Change in Qd Of Demand Percentage Change in Price
- 6. Elasticity, Percentage Changeand Slope Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve. But instead of looking at unit change, elasticity looks at percentage change. What do we mean by percentage change?
- 7. Brief Assessment on Percentage s • If thereare 50 tomatoes in a store and you picked 16 of them, what percentage of the total did you pick? • Paul used to weigh 200 lbs last year, but now he only weighs 175 lbs. How many lbs did he lose? What is the percent change of the loss? • What is the average of 300 and 330? What is the midpoint?
- 8. Computing the Price Elasticity of Demand priceinchangePercentage demandedquatityinchangePercentage demandofelasticityPrice Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as: 2 percent10 percent20 100 002 002202 100 10 810 . )..( )(
- 9. COMPUTING THE PRICE ELASTICITYOF DEMAND USING THE MIDPOINT FORMULA 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. )/2]P)/[(PP(P )/2]Q)/[(QQ(Q =DemandofElasticityPrice 1212 1212
- 11. Computing the Price Elasticity of Demand Example:If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as: 32.2 5.9 22 2/)20.200.2( )00.220.2( 2/)810( )810( percent percent )/2]P)/[(PP(P )/2]Q)/[(QQ(Q =DemandofElasticityPrice 1212 1212
- 12. Ranges of Elasticity InelasticDemand Percentage change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one. Elastic Demand Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.
- 13. Perfectly Inelastic Demand -Elasticity equals 0 Quantity Price 4 $5 Demand 100 2. ...leaves the quantity demanded unchanged. 1. An increase in price...
- 14. Inelastic Demand - Elasticityis less than 1 Quantity Price 4 $51. A 25% increase in price... Demand 10090 2. ...leads to a 10% decrease in quantity.
- 15. Unit Elastic Demand -Elasticity equals 1 Quantity Price 4 $51. A 25% increase in price... Demand 10075 2. ...leads to a 25% decrease in quantity.
- 16. Elastic Demand - Elasticityis greater than 1 Quantity Price 4 $51. A 25% increase in price... Demand 10050 2. ...leads to a 50% decrease in quantity.
- 17. Perfectly Elastic Demand -Elasticity equals infinity Quantity Price Demand$4 1. At any price above $4, quantity demanded is zero. 2. At exactly $4, consumers will buy any quantity. 3. At a price below $4, quantity demanded is infinite.
- 18. Determinants of Price Elasticityof Demand Necessities versus Luxuries Availability of Close Substitutes Definition of the Market Time Horizon
- 19. Determina nts of Price Elasticityof Demand • Demand tends to be more inelastic – If the good is a necessity. – If the time period is shorter. – The smaller the number of close substitutes. – The more broadly defined the market.
- 20. Determinants of Price Elasticityof Demand Demand tends to be more elastic : if the good is a luxury. the longer the time period. the larger the number of close substitutes. the more narrowly defined the market.
- 21. Elasticity and Total Revenue Total revenueis 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. $4 Demand Quantity P 0 Price P x Q= $400 (total revenue) 100 Q Elasticity and Total Revenue
- 23. The Total RevenueTest for Elasticity INELASTIC DEMAND ELASTIC DEMAND Decrease in Price ELASTIC DEMAND INELASTIC DEMAND Increase in Price Decrease in Total Revenue Increase in Total Revenue
- 25. Income Elasticity of Demand Income elasticityof demand measures how much the quantity demanded of a good responds to a change in consumers’ income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.
- 26. Computing Income Elasticity IncomeElasticity of Demand Percentage Change in Quantity Demanded Percentage Change in Income =
- 27. Income Elasticity - Types of Goods- Normal Goods Income Elasticity is positive. Inferior Goods Income Elasticity is negative. Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.
- 28. Cross Price Elasticity of Demand •Elasticity measure that looks at the impact a change in the price of one good has on the demand of another good. • % change in demand Q1/% change in price of Q2. • Positive-Substitutes • Negative-Complements.