Econ 14 Files
Econ 14 Lecture
Notes
Lecture 7: Supply and Demand, Part 4
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Economics 14 |
Lecture 7: Supply and Demand, Part 4
price elasticity of demand
determinants of elasticity
lasticity and total revenue
price discrimination
Price Elasticity of Demand
The price elasticity of demand measures the magnitude by which consumers change the quantity demanded in response to a change in the price of the product. The more elastic demand is, the more responsive it is to price changes.
percentage change in quantity demanded
price elasticity of demand = ----------------------------------------
percentage change in price
Determinants of Price Elasticity of Demand
- existence of substitutes: the more substitutes available for a product, the more elastic its demand
- luxury or a necessity: the demand for luxuries is relatively elastic
- importance of the product in the consumer's total budget: the greater the portion of the consumer's budget, the more elastic the demand
- definition of the market: the more widely defined the market, the more inelastic the demand, e.g. food vs. green beans
- time period under consideration: the longer the time period, the more elastic
Elasticity and Total Revenue
Total revenue (TR) is equal to price times quantity sold.
- if demand is elastic, a rise in price causes a fall in TR
- if demand is inelastic, a rise in price causes TR to increase
Price Discrimination
Price discrimination refers to charging different customers different prices for the same product, e.g. senior citizens discounts on movie tickets. Firms can increase their profits by charging a higher price to customers with inelastic demand and a lower price to customers with demand that is elastic.
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David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31 |
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