Elasticity of demand refers to the responsiveness of quantity demanded to changes in price. Price elasticity of demand is measured as the percentage change in quantity demanded divided by the percentage change in price. It can be measured over a segment of the demand curve or at a single point. Factors that determine price elasticity include availability of substitutes, proportion of income spent on the good, nature of the good, and possibilities of postponing consumption. Price elasticity is important because it indicates how changes in price will affect total revenue and consumer expenditure.
2. Meaning Elasticity of demand is defined as the percent change in quantity demanded to percent change in the price- MARSHALL Price elasticity of demand measures the degree of responsiveness of quantity demanded of a good to a change in price- BOULDING The formula for the Price Elasticity of Demand (PEoD) is:PEoD = (% Change in Quantity Demanded)/(% Change in Price)
3. Ed = Percentage Change in Quantity Demanded Percentage Change in Price = Change in Quantity Demanded ÷ Change in Price Quantity Demanded Initially Initial Price = ∆Qd x P ∆P Qd where ∆Qd= Change in Quantity Demanded ∆P = Change in Price
4. Elasticity over a Segment of Demand Curve Price D R P0 S P1 D 0 Quantity Demanded Q0 Q1
5. Also called arc elasticity- Price Elasticity over a Segment of Demand Curve Q1 – Q0 (P0 + P1)/2 X ep = P1 – P0 (Q0 + Q1)/2 P0 + P1 Q1 – Q0 = X Q0 + Q1 P1 – P0 P0 + P1 Q = X P Q0 + Q1
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7. Here changes in quantity demanded and price are infinitesimally small
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11. Total Expenditure = P.Q = Total Revenue Price Supply Total Revenue = OAEQ Total Expenditure = OAEQ E A Demand Quantity 0 Q
12. Predicting Changes in Total Revenue and Total Expenditure in Response to Price Increase
