13-02-2013, 09:59 AM
Elasticity and Demand
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Price Elasticity of Demand (E)
P & Q are inversely related by the law of demand so E is always negative
The larger the absolute value of E, the more sensitive buyers are to a change in price
Price Elasticity of Demand (E)
Percentage change in quantity demanded can be predicted for a given percentage change in price as:
Percentage change in price required for a given change in quantity demanded can be predicted as:
Factors Affecting Price Elasticity of Demand
Availability of substitutes
The better & more numerous the substitutes for a good, the more elastic is demand
Percentage of consumer’s budget
The greater the percentage of the consumer’s budget spent on the good, the more elastic is demand
Time period of adjustment
The longer the time period consumers have to adjust to price changes, the more elastic is demand
Calculating Price Elasticity of Demand
Price elasticity can be measured at an interval (or arc) along demand, or at a specific point on the demand curve
If the price change is relatively small, a point calculation is suitable
If the price change spans a sizable arc along the demand curve, the interval calculation provides a better measure
Computation of Elasticity at a Point
When calculating price elasticity at a point on demand, multiply the slope of demand , computed at the point of measure, times the ratio P/Q, using the values of P and Q at the point of measure
Method of measuring point elasticity depends on whether demand is linear or curvilinear