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Price Elasticity of Demand
• Ep = %∆Q = ΔQ/Q = ΔQ . P
%∆P ΔP/P ΔP Q
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Price Elasticity Interpretation
Ep Terminology Interpretation
|Ep| = 0 Perfectly Inelastic The amount of goods demanded
does not change with the change of
price
0 < |Ep| < 1 Inelastic The amount of goods demanded
change with smaller percentage
than percentage of price
|Ep| = 1 Unit Elastic The amount of goods demanded
changes with the same percentage
of price
|Ep| > 1 Elastic The amount of goods demanded
change with a greater percentage
than percentage of price 3
Income Elasticity of Demand
• EI = %∆Q = ΔQ/Q = ΔQ . I
%∆I ΔI/I ΔI Q
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Income Elasticity Interpretation
EI Terminology Interpretation
EI > 0 Normal The amount of goods
demanded increase with
increasing incomes
EI < 0 Inferior The amount of goods
demanded decreases with
increasing income
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Cross Elasticity of Demand
• Cross elasticity : measure how responsive the quantity demanded
of the first good is to a change in price of the second
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Cross Elasticity Interpretation
EC Terminology Intrepretation
EC > 0 Substitutes The amount of goods i
demanded increase with
increasing price of goods j
EC < 0 Complements The amount of goods i
demanded decrease with
increasing price of goods j
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Price Elasticity of Supply
• Price elasticity of supply : measure how responsive the quantity
supplied is to a change in price
• Ep = %∆Q = ΔQ/Q = ΔQ . P
%∆P ΔP/P ΔP Q
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Exercise 1
The US Department of Agriculture (USDA) has been concerned that American aren’t eating
enought fruits and vegetbles, and they have considered coupons and other subsidies to
encourage people to eat these healthier foods. The price elasticities of demand for each fruit
are as follows:
Fruit Price Elasticities of Demand
Apple -0.16
Banana -0.42
Grapefruit -1.02
Grapes -0.91
Orange -1.14
1. Based on these Price Elasticities of Demand, which fruit is most inelastically demanded?
Which is most elastically demanded?
2. For which of these fruit would a 10% drop in price cause an increase in total revenue
from the sale of that fruit?
3. If government could offer “10% off” coupons for only three of these fruits, and wanted
to have the biggest possible effect on quantity demanded, which three fruits should get
the coupons?
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4. Overall, the authors found that for the average fruit, the elasticity of demand was about
-0.5. Is the demand elastic or inelastic?
Exercise 2
Supply of wheat : QS = 1800 + 240 P
Demand for wheat : QD = 3550 – 266 P
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