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# 03elas_sg - Chapter Chapter 3 Elasticity 3 Elasticity...

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Chapter 3: Elasticity 1 Chapter 3 Elasticity CHAPTER SUMMARY The elasticity of demand measures the responsiveness of demand to changes in a factor that affects demand. Elasticities can be estimated for price, income, prices of related products, and advertising expenditures. The own-price elasticity is the ratio of the percentage change in quantity demanded to the percentage change in price, and is a negative number. Demand is price elastic if a 1% increase in price leads to more than a 1% drop in quantity demanded, and inelastic if it leads to less than a 1% drop in quantity demanded. The own-price elasticity can be used to forecast the effects of price changes on quantity demanded and buyer expenditure. Elasticities can be used to forecast the effects on demand of simultaneous changes in multiple factors. All elasticities vary with adjustment time. The long-run demand is generally more elastic than the short-run demand in the case of nondurables, but not necessarily for durables. Elasticities can be estimated from records of past experience or test markets by the statistical technique of multiple regression. KEY CONCEPTS elasticity of demand income elasticity cross section own-price elasticity cross-price elasticity dependent variable arc approach advertising elasticity independent variable point approach short run multiple regression e l a s t i

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Chapter 3: Elasticity © 2001, I.P.L. Png and C.W.J. Cheng 2 2. Describe the arc approach and the point approach when deriving the own-price elasticity of demand and discuss the properties of own-price elasticity. 3. Discuss the intuitive determinants of price elasticity. 4. Introduce the relationship between own-price elasticity and total revenue when there is a price change for an elastic and inelastic item. 5. Describe the application of income elasticity, cross-price elasticity, and advertising elasticity, as well as forecasting the effects of multiple factors on demand. 6. Explain the importance of time on elasticity. 7. Discuss the statistical estimation of elasticities. NOTES 1. Elasticity of demand . (a) Definition - the responsiveness of demand to changes (increase or decrease) in an underlying factor (e.g., price of the product itself, income, prices of related products, advertising). (b) Changes in any of these factors will lead to a movement along or shift of the demand curve. (c) There is an elasticity corresponding to every factor (i.e., measuring the responsiveness of demand to changes in each factor) that affects demand. (d) Elasticities depend on the time available for adjustment. (e) With elasticities, managers can forecast the effect of single or multiple changes in the factors underlying demand. (f)
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03elas_sg - Chapter Chapter 3 Elasticity 3 Elasticity...

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