This document discusses concepts related to demand and price elasticity of demand. It defines price elasticity of demand as a measure of how much the quantity demanded of a good responds to a change in the price of that good. It identifies factors that influence price elasticity and discusses different types of elasticity including perfectly inelastic, inelastic, unit elastic, elastic, and perfectly elastic demand. It also discusses the relationship between price changes, quantity demanded, and total revenue.

13. Quantity 100 50 Demand 0 4 5 Price Demand is price elastic

16. Price (a) Perfectly Inelastic Demand: Elasticity Equals 0 0 Quantity 4 5 1. An increase in price . . . Demand 100 2. . . . leaves the quantity demanded unchanged.

17. (b) Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 Price 5 90 Demand 1. A 22% increase in price . . . 2. . . . leads to an 11% decrease in quantity demanded. 4 100

18. Copyright©2003 Southwestern/Thomson Learning (c) Unit Elastic Demand: Elasticity Equals 1 Quantity 0 Price 2. . . . leads to a 22% decrease in quantity demanded. 4 100 5 80 1. A 22% increase in price . . . Demand

19. (d) Elastic Demand: Elasticity Is Greater Than 1 Quantity 0 Price Demand 4 100 5 50 1. A 22% increase in price . . . 2. . . . leads to a 67% decrease in quantity demanded.

20. (e) Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly Rs 4, consumers will buy any quantity. 1. At any price above Rs 4, quantity demanded is zero. 3. At a price below Rs 4, quantity demanded is infinite.

22. Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Demand Q P P × Q = Rs 400 (revenue) 4 100

24. Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price Quantity 0 Price An Increase in price from Rs 1 to Rs 3… … leads to an Increase in total revenue from RS 100 to Rs 240 Demand Revenue = Rs 100 Revenue = RS 240 Demand $1 100 $3 80

25. Cross Price Elasticity of demand measures the responsiveness of demand for a product to a change in the price of other related products. We normally focus on the links between changes in the prices of substitutes and complements . The formula for cross price elasticity of demand Cross Price Elasticity of Demand (CPed) = % change in the demand for Good X % change in the price of Good Y. When there is no relationship between two products, the cross price elasticity of demand is zero.

26. The usefulness of price elasticity for producers . Firms can use price elasticity of demand (PED) estimates to predict: The effect of a change in price on the total revenue & expenditure on a product. The likely price volatility in a market following unexpected changes in supply – this is important for commodity producers who may suffer big price movements from time to time. The effect of a change in a government indirect tax on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer. Information on the price elasticity of demand can be used by a business as part of a policy of price discrimination (also known as yield management). This is where a monopoly supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel or yield management by many of our domestic and international airlines.

27. The price elasticity of demand can be applied to a variety of problems in which one wants to know the expected change in quantity demanded or revenue given a contemplated change in price. Elasticity is an important concept in understanding the incidence of indirect taxation , distribution of wealth and different types of goods as they relate to the theory of consumer choice . Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus , producer surplus , or government surplus .