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Demand ElasticityPart One: What is Inelastic and Elastic Demand?What is the price elasticity of demand?When is demand considered to be elastic?When is demand considered to be inelastic? Give an example.How does someone’s income affect the elasticity of a product?How does addiction factor into the elasticity of a product? Why?Part Two: Elastic or Inelastic?Price Elasticity of Demand is a measure of how responsive demand is to a change in price. If a price change leads to a considerably bigger change in quantity demanded, we would consider the good to be responsive to a price change: hence elastic. If, however, a similar price change leads to a much smaller change in demand, we would consider it inelastic.To get a more precise measure than this of the responsiveness to a price change we can calculate a value for price elasticity of demand. We use the formula:Use the formulas above to calculate values of Price Elasticity for all the situations below:PRICE ELASTICITY OF DEMAND ??????= ?????PERCENTAGE CHANGE IN QUANTITY DEMANDEDPERCENTAGE CHANGE IN PRICEStep One:CHANGE IN PRICEX 100 ?= ?% CHANGE IN PRICE ?INITIAL PRICEStep Two:CHANGE IN QUANTITY ??X 100 ?= ?% CHANGE IN QUANTITY DEMANDED?????INITIAL QUANTITYIf Price Elasticity of Demand is: ????????????Greater than 1 ?= ??Elastic DemandLess than 1 ?= ??Inelastic DemandEqual to 1 ?= ??Unit ElasticPriceQuantity% change in price% change in quantity demandedPrice Elasticity of Demand(Absolute value = always positive)InitialNewInitialNew253010040?20%-60%? 1. ____3_______4070120902. ____ ______2002208064 3. _______ __5075150135 ? 4. ___________In each case identify whether you would describe it as elastic / unit elastic / inelastic1. _____________Elastic___________________2. _________________________ 3. ____________4. ___________Part Three: Elastic Money?Different elasticity values will lead to different effects on the level of total revenue a firm receives. For example, if a good is elastic and a firm increases the price, by say 10%, they will lose more than 10% of their business, and so although they are getting more money for each one they sell, they are selling far fewer.To see the effect that elasticity has on total revenue fill in the table below:Initial Price x ?Initial Quantity = Before Price Change RevenueNew Price ??x ?New Quantity ???= After Price Change RevenueTo decide whether or not each good is elastic, inelastic, or unit elastic use the following criteria.Inelastic Demand = Price and Total Revenue move in the same directionElastic Demand ????= ?Price and Total Revenue move in opposite directionsUnit Elastic ??= Total Revenue remains the same when price changesPriceQuantityRevenueRevenueChange in Price and RevenueInitialNewInitialNewBefore price changeAfter price changeDirection of Price ChangeDirection of Revenue Change253010040? 25001200Up? Down407012090? 2002108064?5075150135In each case identify whether you would describe it as elastic / unit elastic / inelastic1. ___________Elastic___________________________2. ___________ ___________________________3. ____________________________________4. ___________ ___________________________Part Four: What determines Elasticity?As we have seen above it is important to a company to have an idea of the value of the elasticity of demand of its good or service as it will affect what happens to their total revenue as price changes. What should the company aim to do with their price in each of the circumstances below?ElasticityChange in price to increase total revenue??(Increase or decrease price?)Elastic?Inelastic?If the company want to estimate the value of the price elasticity of their product, then they need to judge it against the following criteria:Proportion of income spent on the good - the lower the proportion of income spent, the more ????inelastic the good will tend to be The number of substitutes - the more substitutes a good has the easier it is for consumers to switch to another product if the price goes up The length of time since the price change – the longer the time period that has elapsed since the price change, the more elastic demand will be The level of necessity or addiction - the more necessary or addictive something is, the more inelastic it will be Judge the products in the table below to decide whether you think they will be elastic or inelastic:ProductElastic or inelastic?Reasons?Movie tickets?Elastic?Luxury, Not NecessaryA luxury holiday?Eggs ??Computers - home users??Computers - business users??Cigarettes??Automobiles (the product category)Honda Civic Automobile ? ................
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