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:
PRICE ELASTICITY OF DEMAND =
percentage change* in demand
percentage change* in price
Use the formula above to calculate values of Price Elasticity for all the situations below:
*percentage change: (difference/original number) x100 = % change
In each case identify whether you would describe it as elastic / unit elastic / inelastic
1. _________________________
2. _________________________
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4. _________________________
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:
How much has revenue increased or decreased in each case?
1. _________________________
2. _________________________
3. _________________________
4. _________________________
In the table below put a mark in the box that associates the appropriate elasticity value with the appropriate effect on total revenue when price rises (as in the above examples):
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 do with their price in each of the circumstances below?