Elasticity of Demand- A measure of how consumers react to a
change in price
o
Elastic Demand- Demand that is very sensitive to a change
in price (E > 1)
§ Product
is not a necessity
§ Available
substitutes
§ Ex:
Soda, Steak, Candy, Fur Coats
o
Inelastic Demand- Demand that is not very sensitive to a
change in price (E < 1)
§ Product
is a necessity
§ Few
to no substitutes
§ People
will buy no mater what
§ Ex:
Medicine, Salt, Gas, Milk
o
Unit(ary) Elastic- (E = 1)
Price Elasticity of Demand
o
Step
1: Quantity: First take the new quantity, subtract the
old quantity, and divide the difference by the old quantity.
[New Quantity – Old Quantity]/Old
Quantity
o
Step
2: Price: Then, take the new price, subtract the old price, and
divide the difference by the old price.
[New Price – Old Price]/Old Price
o
Step
3: PED: Finally, take your answer from Step 1 and divide it by
the answer from Step 2.
[%
change in quantity demanded]/[% change in price]
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