Econ. Chap. 5
Demand Elasticity and Price
- Elasticity gauges how quickly demand changes in response to price
changes.
- Price elasticity of demand is calculated as follows: % change in quantity
requested / % change in price.
- Graphs: Elastic demand has a low slope whereas inelastic demand has a
high slope.
- Low desire to buy elsewhere is a sign of inelastic demand, which is
characterized by a minimal response in the amount required as price
increases.
- Elastic demand: high propensity to buy elsewhere and big reaction in
amount requested when price increases. Elasticity > 1.
Excessively elastic demand
- Perfectly inelastic demand: vertical straight line, elasticity = 0, amount
sought doesn't vary in response to price change
- Perfectly elastic demand has a straight horizontal line with elasticity equal
to infinity and an unlimited reaction to price change.
- The number of available replacements: more substitutes = higher price elasticity
of demand
- Adjustment period: longer period of adjustment equals greater elastic demand
- money spent as a percentage: higher percentage of money spent on a good or
service equals more elastic demand
Elasticity and Overall Sales
- Pricing strategies for businesses are based on demand elasticity, which
dictates when to lower prices and when to raise prices in order to
maximize overall income.
- Total Revenue (all funds received by a firm from sales) is equal to the price
per unit (P) times the number of units sold (Q).
- Companies with elastic demand improve overall income by lowering prices
- Businesses with inelastic demand see an increase in total revenue as
prices go up.
Demand Elasticity and Price
- Elasticity gauges how quickly demand changes in response to price
changes.
- Price elasticity of demand is calculated as follows: % change in quantity
requested / % change in price.
- Graphs: Elastic demand has a low slope whereas inelastic demand has a
high slope.
- Low desire to buy elsewhere is a sign of inelastic demand, which is
characterized by a minimal response in the amount required as price
increases.
- Elastic demand: high propensity to buy elsewhere and big reaction in
amount requested when price increases. Elasticity > 1.
Excessively elastic demand
- Perfectly inelastic demand: vertical straight line, elasticity = 0, amount
sought doesn't vary in response to price change
- Perfectly elastic demand has a straight horizontal line with elasticity equal
to infinity and an unlimited reaction to price change.
- The number of available replacements: more substitutes = higher price elasticity
of demand
- Adjustment period: longer period of adjustment equals greater elastic demand
- money spent as a percentage: higher percentage of money spent on a good or
service equals more elastic demand
Elasticity and Overall Sales
- Pricing strategies for businesses are based on demand elasticity, which
dictates when to lower prices and when to raise prices in order to
maximize overall income.
- Total Revenue (all funds received by a firm from sales) is equal to the price
per unit (P) times the number of units sold (Q).
- Companies with elastic demand improve overall income by lowering prices
- Businesses with inelastic demand see an increase in total revenue as
prices go up.
