Professional Documents
Culture Documents
of Demand
PED
If price rises by 10% - what happens to quantity
demanded?
We know QD will fall
By more than 10%?
By less than 10%?
Elasticity measures the extent to which QD
will change
Why is it important for managers to know
the PED of their products?
PED
Price Elasticity of Demand
o Def. The responsiveness of quantity
demanded to changes in price
o Where % change in quantity demanded
is greater than % change in price
elastic
o Where % change in quantity demanded
is less than % change in price inelastic
Determinants of PED
Closeness of
substitutes
Proportion of Income
Luxuries Versus
Necessities
Time
Old price
New QD
Coke
5,000
6,000
100
90
Cookies
4,000
3,000
50
80
Water
2,000
4,000
90
80
Sandwich
10,000
12,000
20
10
Fried rice
7,000
6,000
60
80
Total Revenue
D
100
Activity
1. For the previous table, draw the linear demand
curves.
2. Calculate the revenue, before and after the
change in price.
3. What are the rules regarding price changes,
elasticity, and revenue?
If demand is price
inelastic:
Increasing price would
increase TR
Reducing price would
reduce TR
Unitary elasticity
Activity
Answer TYU 3.1 3.4
Income Elasticity of
Demand
o The responsiveness of quantity demanded
to changes in incomes
Normal Good quantity demanded rises
as income rises
Inferior Good quantity demanded falls
as income rises
Income Elasticity of
Demand
The Formula:
Yed =
Income Elasticity of
Demand
A positive sign denotes a normal good
A negative sign denotes an inferior good
Application of YED
Commodities = low YED
Manufactured goods = medium YED
Services = high YED
What impact does this have on rich and poor
countries as the world global GDP increases
Activity
Read pg 62-66
Answer TYU 3.6
% QD of good X
__________________
Xed =
% Price of good Y
Example
Calculate Xed
Complement or
substitute?
Elastic or inelastic?
QD of CDs
Old
New
10
New
QD of Tea
10
20
P of Coffee
$4
$5
Activity
TYU 3.5
%
Quantity Supplied
____________________
Pes =
% Price
Example
If prices increase from $5 to $6, suppliers are
willing to increase quantity supplied from 10 units
to 11 units.
PES = ?
Elastic or inelastic?
Determinants of PES
1.
Time
o
o
2.
Short run
Long run
Transferability of resources
Unused capacity
Application
PES of primary commodities is low.
Why is this? How does this impact world
commodity prices? How in turn does this impact
the incomes in developing countries?
PES of manufactured goods in relatively high
Why is this? How does this impact prices? How in
turn does this impact the incomes in developed
countries?
Activity
TYU 3.7, 3.8