CLEP Principles of Marketing Study Notes

# The percentage change in demand or the percentage

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The percentage change in demand, or the percentage change in the number of units demanded, divided by the percentage change in the price of the product tells us the Price Elasticity of Demand. For example, if demand for a car goes down 8 percent when a seller raises the price by 2 percent, the price elasticity of demand is -8 / 2, which equals -4.

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The Price Elasticity of Demand Coefficient is the absolute value, or non-negative value, of the Price Elasticity of Demand formula, and is used to determine how elastic the demand is. This coefficient can range from 0 to infinity. For example, if the price elasticity of demand is -4, then the coefficient will be 4, which indicates Elastic. The left column shows the value of the coefficient, the right column shows what happens if you raise the price given that coefficient. Basically, this coefficient tells you how much changing the price affects the demand for the product. You are most likely to encounter the second and fourth values in real life. When the value of the Price Elasticity of Demand Coefficient equals 0, the demand is said to be perfectly inelastic, which means that demand does not decrease at all in response to price increases. Demand is said to be elastic when a change in price causes an opposite change in total revenue--an increase in price will decrease total revenue, and vice versa. This is known as elastic demand . Total revenue is the number of units sold multiplied by the price. In most situations, whether elastic or inelastic, demand goes down to some extent when price goes up--however, in elastic demand, demand drops so quickly in relation to price raises, that total revenue goes down. Demand is said to be inelastic if a change in price results in the same change in total revenue--raising the price increases total revenue. Inelastic demand - increasing the price will increase total revenue, and vice versa. The more people need a certain product, and cannot go with substitutes, the more inelastic demand will be; i.e. demand drops slowly relative to price increases, so total revenue increases. In a perfectly inelastic demand , demand does not go down at all despite price increases. Total revenue is calculated by multiplying the price by the number of units sold. For example, if it costs an organization \$5 for each unit they produce, and they sell each unit for \$7, and they sell 10 units, their total revenue is \$70. Cost is not a factor in total revenue . Elastic Demand - Demand is said to be elastic when a change in price causes an opposite change in total revenue-- an increase in price will decrease total revenue, and vice versa. Total revenue is the number of units sold multiplied by the price. So basically, when selling a product with elastic demand, if the price goes up, demand goes down.
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