Price elasticity of demand

The shape of the demand curve determines the change in demand when price changes. The more sloping demand curve, the more sensitive the demand for change in the price of the goods.

Quantitative characteristic of the sensitivity of demand to price change could serve as the slope of the demand curve, i.e. ratio

or .

However, this value depends on the dimensions of P and Q, i.e. on what units they are measured: KZT, USD and in kilograms, tons, liters, respectively.
Price elasticity of demand is called the percentage change in quantity demanded per 1 percent change in price:

= . (3.1)

This quantity is dimensionless and does not depend on the dimensions of p and Q. For calculations it is convenient to write differently:

= × .

For example, if the price of apples p = 40 tenge, the sales volume Q = 8 tons, and a decrease in the price of goods up to p = 39.5 tenge, volume of demand has increased to 8.2 tons, the price elasticity of demand is

= × = -2.

Hence, the increase in the price of apples at the 1 percent will lead to a two-percent decrease in sales volume.
In the limit tends to zero, price elasticity of demand and price elasticity of demand expressed in terms of the derivative:

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= × , где Q = . (3.2)

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1. существительное
1. canopy
2. bed-curtains
2. прилагательное
1. gentle
2. sloping
3. easy
4. acclivous
5. low-pitched

By the method of calculating the formula (3.1) and (3.2) determine the point elasticity. For a relatively large arc elasticity is used, replacing in (3.1) P and Q on the mean values of = и = , respectively:

= × . (3.3)

The lower the value Δp, the closer the arc elasticity to the point of elasticity. Price elasticity of demand does not take positive values, as according to the law of demand Δp and ΔQ have opposite signs.

There are possible following cases.
1) E_p (D) = 0 - totally inelastic demand. Price change does not alter the volume of demand. Example - a cure for diabetes.
2) -1 <E_p (D) <0 - inelastic demand. Price increase by 1 percent reduces demand by less than 1 percent. Example: bread, daily necessities.
3) E_p (D) = -1 - demand with unit elasticity. With an increase in prices by 1 percent the volume of demand is also declining by 1 percent.
4) -¥ <E_p (D) = <-1 - elastic demand. Price increase by 1 percent leads to a decrease in demand by more than 1 percent.
5) E_p (D) =- ¥ - perfectly elastic demand. For example, for a given product is the perfect substitute.
Since the price elasticity is always positive, its value usually is indicated without minus sign.

Дата добавления: 2015-10-24