⏱️ November 15, 2020
The price elasticity of demand refers to how responsive consumers are to a change in price in the market. It shows us just how much consumers will alter their consumption when the price of a product changes.
Types of Elasticity
There are five types of elasticity for demand: elastic, inelastic, unit elastic, perfectly elastic, and perfectly inelastic.
Graphs of the Different Types of Elasticity
Calculating Price Elasticity of Demand
💡You drop all negatives when you are calculating the elasticity of demand. This formula allows you to calculate the coefficient (a number that tells us the value of elasticity) that represents the elasticity of demand.
The elasticity coefficient you just calculated can be applied to determine the type of demand for that good or service.
💡 Elasticity is NOT the slope of the demand curve. Elasticity varies along a demand curve, even if it is linear.
Elasticity of demand can tell a firm a lot about consumers' buying habits. For example, if a consumer needs a particular medicine to live, then they have very inelastic demand for this product🏥. This tells the firm that they could change the price of the good and the customer will still buy it. On the other hand, a company like Coca-Cola knows that there are a lot of options that their customers could choose from when they purchase soda🥤. This means that the demand for soda is typically more elastic, so Coca-Cola knows they have to be more careful about price changes so they do not lose customers. Total Revenue Test:
Price Elasticity of Demand can also be calculated using the Total Revenue Test. Total revenue = Price x Quantity.
The total revenue test is used to determine the elasticity of demand when we just want to know whether it is elastic, inelastic, or unit elastic and we do not need the actual coefficient. Firms can use this test to determine its pricing strategy. By being aware of how elastic or inelastic a product is, they have better insight on how to maximize their total revenue. The more elastic demand is for a product, the more cautious they need to be about price changes.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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