Price Elasticity Continued...

Price Elasticity Continued... - Price Elasticity...

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Unformatted text preview: Price Elasticity Continued…. You can determine if a product has elastic/inelastic demand by using a formula Price Elasticity of Demand Coefficient = % Change in QD % Change in P Ed = %∆QD %∆P Example: If a 5% cut in the price results in a 10% increase in QD. What if the elasticity coefficient? Ed = %∆QD %∆P = 10 / 5 =2 Therefore, the demand for the product is elastic. MEMORIZE: E > 1 demand is Elastic E < 1 demand is Inelastic E = 1 demand is Unitary E d = |Q 2 – Q 1 | |Qaverage| |P 2 – P 1 | |Paverage| Example: When the price of a product X is decreased from $2.00 to $1.75 the quantity demanded increases from 180,000 units per week to 240,000 units per week. Calculate the price elasticity of demand for product X and determine if the demand is elastic or inelastic. Ed = |Q2 – Q1| |Qaverage| |P2 – P1| |Paverage| = = = 60,000/210,000 0.25/1.88 0.286/ 0.133 2.15 Therefore, the demand for the product is elastic. Price Elasticity of Supply • Similar concept to demand elasticity • If a supplier adjusts supply according to price changes then the supply is elastic • If the quantity supplied does not respond to price changes, then price is inelastic • Price Elasticity of Supply Coefficient (Es) = % ∆ QS % ∆ Price Es > 1 Supply is Elastic Es < 1 Supply is Inelastic Es = 1 Unitary Elastic S1 Perfectly Inelastic Price S2 Elastic Quantity Supplied ...
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