Topic 3 Elasitisity-1 - Topic 3 Elasticity Price Elasticity...

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Topic 3 Elasticity
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The responsiveness or sensitivity of consumer to a price change is measured by a product’s Price Elasticity of demand . Demand for a product is sensitive with price change of the product we call this product is relatively elastic or elastic . Demand for a product is not sensitive with price change of the product we call this product is relatively inelastic or inelastic . Price Elasticity of Demand
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Price Elasticity of Demand
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Calculating Price Elasticity of Demand The price elasticity of demand is calculated by using the formula: Price Elasticity of Demand Percentage change in quantity demanded of product X Percentage change in price of product X E d % Δ Qd % Δ P = =
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The percentage change in quantity demand and price Price Elasticity of Demand Percentage change in quantity demanded of product X Change in quantity demanded of product X Original quantity demanded of product X = Percentage change in price of product X Change in price of product X Original price of product X =
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Price Elasticity of Demand Using average If a price Δ from $4 to $5 the Δ in price is 25% ((4-5)/4) If a price Δ from $5 to $4 the Δ in price is 20% ((5-4)/5) Therefore we use average. By using the average price and average quantity , we get the same elasticity value regardless of whether the price rises or falls. % Δ in Qd of product X Δ in Qd of product X Sum of quantities /2 = % Δ in price of product X Δ in price of product X Sum of prices /2 =
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-The price falls to $19.50 and the quantity demanded increases to 11 pizzas an hour. -The price falls by $1 and the quantity demanded increases by 2 pizzas an hour. Price Elasticity of Demand
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To calculate the price elasticity of demand, we express the changes in prices and quantity demanded as percentages of the average price and average quantity. The average price is (20.5 + 19.5)/2 = $20 and the average quantity demanded is (9+11)/2 =10 pizzas an hour. Price Elasticity of Demand
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The percentage change in quantity demanded, % D Q , is calculated as D Q / Q ave , which is 2/10 = 1/5. The percentage change in price, % D P , is calculated as D P / P ave , which is $1/$20 = 1/20. Price Elasticity of Demand
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The price elasticity of demand is: 𝐸 ? = % D Q % D P = ∆? ? 𝑎𝑣? ∆? ? 𝑎𝑣? = (9 − 11) (11+9 )/2 (20.5 − 19.5) (20.5 + 19.5)/2 = 2 10 1 20 = 1 5 1 20 = −4 Price Elasticity of Demand
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Why use percentage? 1. If we use absolute change, the choice of units will arbitrarily affect our impression of buyer responsiveness. Ex: Price of pen reduce from $3 to $2, consumer increase purchase from 60 to 100. Looks like consumer is sensitive with price change which 1 unite change in price lead 40 unite change in quantity. But in cent we can have 100 unit change in price with 40 unit change in quantity. 2. By using percentage we can correctly compare responsiveness to change in the price of different product.
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