23/09/15
Lesson 1-Elasticities
Learning Objective: Explain the concept of elasticity
DA: Explain the general concept of elasticity, change in price and quantity. Elasticity is a measure of responsiveness. It measures how much something changes when there is a change in one of the factors that determines it. Elasticity of demand
Price elasticity of demand (PED)
Example: A publishing firm discovers that when they lower the price of a magazine from $5 to $4.50, quantity rises from 200,000-230,000.
PED range of values:
Range values of PED is split into three catagories:
|
|
Example: When the price of a carton of strawberry yogurt is raised from $1-1.20, quantity demanded per week falls from 12000 to 10800.
Thus, if a firm has inelastic demand for its product and wishes to increase total revenue, it should raise the price of the product. |
Practice:
Inelastic Demand-
Inelastic Demand-
Elastic Demand- 1st Step=PED coefficient
2nd Step=Calculating TR gain/loss
P Increased & TR Decreased = Elastic 3rd Step=Calculating Revenue boxes
4th Step=Was the price change a sensible decision? |
Practice-
Mas mas mas practica...
Assume that the price of Harina PAN increased from $12-18 and, as a result, quantity demanded decreases from 200,000-180,000.
- Calculate the PED coefficient and determine its relative inelasticity or elasticity
- Illustrate the price/quantity change and calculate TR, decrease or increase?
- Calculate the revenue boxes and determine whether the price change was sensible based on the difference in TR.
Determinants of PED:
- Number and closeness of substitutes
- Necessity of the product and how widely the product is defined
- Time period considered
Practice: