Supply & Demand part 1: Price of elasticity of Demand (01/11/17)

Elasticity of Demand
It is a measure of how consumers react to a change in price.

ELASTIC DEMAND

• Demand that is very sensitive to a Δ in price
• Product is not a necessity
• There are available substitutes

• Examples:

1. Soda
2. Fur coat
3. Pizza

         E >1

INELASTIC DEMAND

• Demand that is very sensitive to a Δ in price
• Product is a necessity
• There are few to none available substitutes

• Examples:

1. Water
2. Gas
3. Salt
4. Insulin

1. Light Bulbs

             E < 1

UNITARY ELASTIC

E = 1

3 step formula of calculating Elasticity of Demand

Step 1: Quantity:

   New quantity - Old quantity / Old quantity

Step 2: Price:

   New price - Old price / Old price

Step 3: PED ( Price of elasticity of Demand)

    % Δ in Quantity / % Δ in Price

Total Revenue (TR) -  P(price) *  Q (quantity), (money)

Practice at:
http://www.economicsonline.co.uk/Questions/PED.html