2 16 15 www samford edu how to study Price Elasticity of Demand how much the buyers buy at a certain price Elasticity measured in percentages percentage change in quantity percentage change in demand change in Q change in P Ex If price of gatorade increases by 25 the quantity demanded will decrease by 50 because there are a lot of substitutes for gatorade E 50 25 2 Inelastic always negative because the demand curve is negative Elasticity coefficient less than one Inelastic equal to one unit elastic more than one elastic The more vertical the demand line the less elastic it is inelastic demand curve for natural gas The amount that buyers buy does not really depend on the price because consumers have such a high demand for that item The supply curve is usually inelastic not straight it is a curved line 1 how does concept of price elasticity of demand relate to other concepts 2 how is it different from other concepts 3 how can I relate this to my personal experience 4 how am I expected to use apply this concept Price elasticity is different at each point E P Q 1 slope 2 18 15 slope is the same for the demand curve P Q decreases as price goes down and quantity goes up E change in Quantity change in price Elastic Substitutes Elastic if greater than 1 Inelastic if less than 1 Unit Elastic if the price is equal to 1 If Inelastic don t care about price Price Elasticity is always negative The more vertical the slope the more inelastic Price and quantity have inverse relationship Ex Price goes up quantity goes down If price goes down quantity goes up Perfectly Inelastic slope is zero perfectly vertical line Perfectly Elastic horizontal line Revenue P Q Ex If a toll cost 1 trip and there are 100 000 trips E 2 should they raise price of toll by 10 2 x 10 change Q 20 Rev1 1 100 000 100 000 Rev2 1 10 80 000 88 000 Therefore total rev decreases by 12 000 dollars and so they should not raise the price of tickets by 10 Ex If toll 1 trip and there are 100 000 trips and E 0 5 should they raise price of toll by 10 0 5 x 10 change Q 5 Rev1 1 100 000 100 000 Rev2 1 10 95 000 104 500 Therefore totalt rev increased by 4 500 and they would benefit from increasing the price by 10 If Dell charges 500 dollars for a computer and the company says their E 2 To increase cash flow should Dell increase or decrease the price dell should lower the price because the absolute value of 2 is greater than 1 and they need to make it equal 1 to maximize the total revenue Cross price elasticity of demand the percentage change in quantity demanded of good A from a 1 change in the price of good B complements have a negative cross price elasticity substitutes have a positive cross price elasticity Ex Apples and oranges If the price of apples goes up the quantity demanded or oranges goes up Income elasticity of demand the percentage change in quantity demanded from a 1 change in income Positive income elasticity is a normal good Negative income elasticity is an inferior good
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