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CHAPTER 4
P R I C E E L A S T IC I T Y
CHAPTER CONTENTS
LEARNING OUTCOMES -------------------------------------------------- 49
CALCULATION OF PRICE ELASTICITY OF DEMAND ------------------ 50
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
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LEARNING OUTCOMES
(a) Calculate the price elasticity of demand and the price elasticity of supply.
(b) Explain the determinants of the price elasticities of demand and supply.
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Elastic Demand
$
Qty
Qty
There are two means by which the elasticity of demand may be calculated:
1
PED =
PED =
Interpretation
The output is typically a negative value, however it is usual to ignore the minus
sign and just state the absolute value of the co-efficient for the purpose of
interpretation.
The value of demand elasticity may be anything from zero to infinity.
Demand is inelastic if the absolute value is less than 1.
Demand is elastic if the absolute value is greater than 1.
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CHAPTER 4
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Coefficient value
Type of good
Example
Perfectly inelastic
0 (zero)
Necessity
Food
Relatively elastic
>1
Luxury
Designer clothes
Perfectly elastic
Infinity
Relatively inelastic
Unit elasticity
Between 0
Discussion 1
Based on the above table, label the following diagram according to the various
levels of elasticity:
Price $
Quantity (Units)
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CHAPTER 4
P R I C E E L A S T IC I T Y
Discussion 2
Complete the following demand diagrams so as to illustrate:
Perfectly elastic demand
Qty
Qty
Qty
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Exercise 1
If the quantity demanded for a good rises from 200 to 300 units when the price
falls from $10 to $6, state the following:
(a)
(b)
% change in price.
(c)
point method .
Exercise 2
Calculate the PED based on the following:
(a)
The price increases from $10 to $12 and the quantity demand falls from 400
units to 200 units.
(b)
The price increases from $6 to $9 and the quantity demanded falls from 500
units to 250 units.
(c)
The price decreases from $40 to $30 and the quantity demanded increases
from 50 units to 55 units.
Results Table:
(a)
(b)
(c)
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Degree of necessity
2.
Availability of substitutes
3.
Period of time
4.
5.
Habitual purchasing
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P R I C E E L A S T IC I T Y
Discussion 3
Complete the following supply diagrams so as to illustrate:
Qty
Qty
Qty
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P R I C E E L A S T IC I T Y
Existence of inventories
2.
Availability of labour
3.
Spare capacity
4.
5.
Barriers to entry
6.
Time scale
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