Chapter 6
Law of demand: how higher price how less buying, how cheaper price how more
buying.
Relatively elastic or elastic:
High responsive on price change. Like with a restaurant if the price are going up
consumer will go elsewhere or just eat at home.
Relatively inelastic or inelastic:
Small responsive on price change. Like toothpaste consumer don’t really pay
attention to the price of this product. This causes only small changes in the
amount purchased.
% change in dependent variable : % change in independent variable
Substitutability:
Large number of substitute goods that are available the greater the Price
Elasticity demand.
Proportion of income:
Higher price of good relative to consumers income the greater the PED.
Luxuries VS necessities:
The more that a good is considered as a luxury rather than a normal the greater
the PED.
Time:
Product demand is more elastic the longer the time period. Consumers often
need time to adjust to changes in prices.
Types of elasticity:
Income Elasticity of Demand:
Cross Elasticity of Demand;
Price Elasticity of Supply.
Inelastic
Inelastic ratio
inelastic demand: E less 1
perfectly inelastic demand: E = 0
inelastic: not sensitive to changes in price
Inelastic demand:
consumers are NOT sensitive or insensitive to a change in price ; small changes
in QD
Inelastic sensitivity:
Just a little change in consumer because of price change.
Often basic products: bread, medicine, water, house. Consumer will (have to) buy
this anyway regardless the price.
Perfectly inelastic: quantity demand does not change, no matter the difference in
the price.
, In the graph the demand curve will stand right up like in the middle of the graph
ED= 0:
TR Graph in inelastic:
Price increased comparing to the Quantity
Elastic demand
Calculate Elasticity Demand
Price elasticity of demand:
If price of product change, by which amount does the QD of that product
changes?
There is 1% decrease or increase in the price how much % is the change in QD?
Calculate the Change in QD:
% Change in QD = Qnew – Qold : 2Qaverage.( =1)answer
2
Qaverage = Qold – Qnew : 2
Calculate the % change in price:
% change Price = Pnew + Pold : 1Paverage (= 2 )answer
1
Paverage = Pold – Pnew : 2
Then you have to dived the answer.
ED= % change in QD : % change in price x 100
(1 : 2)
Elasticity the outcome is always a ratio (single number) and always drop the
minus sign.
Change =
% Q=
Qnew – Qold
11 – 9 = 2
Qold + Qnew
9 + 11 = 20
20 :2 =10
2 : 10 x 100=20 = % change QD.
% change P=
Pnew – Pold
2,90 – 3,10 = 0,20
Pold – Pnew
3,10 + 2,90 = 6
6:2=3
0,20 : 3 x 100 = 6,67 = % change in P.
20 : 6,67 = 3
Elastic sensitivity:
Often luxury product: fresh meat, holidays, cars, furniture.
Law of demand: how higher price how less buying, how cheaper price how more
buying.
Relatively elastic or elastic:
High responsive on price change. Like with a restaurant if the price are going up
consumer will go elsewhere or just eat at home.
Relatively inelastic or inelastic:
Small responsive on price change. Like toothpaste consumer don’t really pay
attention to the price of this product. This causes only small changes in the
amount purchased.
% change in dependent variable : % change in independent variable
Substitutability:
Large number of substitute goods that are available the greater the Price
Elasticity demand.
Proportion of income:
Higher price of good relative to consumers income the greater the PED.
Luxuries VS necessities:
The more that a good is considered as a luxury rather than a normal the greater
the PED.
Time:
Product demand is more elastic the longer the time period. Consumers often
need time to adjust to changes in prices.
Types of elasticity:
Income Elasticity of Demand:
Cross Elasticity of Demand;
Price Elasticity of Supply.
Inelastic
Inelastic ratio
inelastic demand: E less 1
perfectly inelastic demand: E = 0
inelastic: not sensitive to changes in price
Inelastic demand:
consumers are NOT sensitive or insensitive to a change in price ; small changes
in QD
Inelastic sensitivity:
Just a little change in consumer because of price change.
Often basic products: bread, medicine, water, house. Consumer will (have to) buy
this anyway regardless the price.
Perfectly inelastic: quantity demand does not change, no matter the difference in
the price.
, In the graph the demand curve will stand right up like in the middle of the graph
ED= 0:
TR Graph in inelastic:
Price increased comparing to the Quantity
Elastic demand
Calculate Elasticity Demand
Price elasticity of demand:
If price of product change, by which amount does the QD of that product
changes?
There is 1% decrease or increase in the price how much % is the change in QD?
Calculate the Change in QD:
% Change in QD = Qnew – Qold : 2Qaverage.( =1)answer
2
Qaverage = Qold – Qnew : 2
Calculate the % change in price:
% change Price = Pnew + Pold : 1Paverage (= 2 )answer
1
Paverage = Pold – Pnew : 2
Then you have to dived the answer.
ED= % change in QD : % change in price x 100
(1 : 2)
Elasticity the outcome is always a ratio (single number) and always drop the
minus sign.
Change =
% Q=
Qnew – Qold
11 – 9 = 2
Qold + Qnew
9 + 11 = 20
20 :2 =10
2 : 10 x 100=20 = % change QD.
% change P=
Pnew – Pold
2,90 – 3,10 = 0,20
Pold – Pnew
3,10 + 2,90 = 6
6:2=3
0,20 : 3 x 100 = 6,67 = % change in P.
20 : 6,67 = 3
Elastic sensitivity:
Often luxury product: fresh meat, holidays, cars, furniture.
