Income Elasticity of Demand Income Elasticity of Demand measures the responsiveness of demand to a change in income. Price Elasticity of Demand Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in price Elasticities Cross Elasticity of Demand Cross Elasticity of Demand measures the responsiveness for one good given a change in price of another. Price Elasticity of Supply Price Elasticity of Supply measures the responsiveness of quantity supplied to a change in price. Using Elasticities Predict sales revenue Calculating the Elasticity of Demand PED = % change in QD / % change in P

= (1/20.50)x100 / (2/9)x100

=4.87 / 22.23

=0.22 Hint : Percentage Change = (change/original)x100 Elastic - Consumers are responsive to a change in price Inelastic - Consumers are not very responsive to a change in price Inelastic and Elastic Demand PED = 0 PED = infinity Quantity remains constant as Price changes Price remains constant as Quantity changes Elasticity along a linear demand curve Elasticity and Revenue Factors effecting elasticity of demand Pricing strategy How change in income affects sales Taxing goods Helpful to industries using complementary goods Helpful to industries using substitutes to predict the effect of a cut in prices on competitors sales Elasticity decreases as price falls and the quantity demanded increases Demand is unit elastic at the midpoint At prices above the midpoint demand is elastic At prices below the midpoint demand is inelastic Number and closeness of substitutes The proportion of income for which the good accounts The influence of habit PED = 1 Quantity demanded is proportionate to Price A normal good A good for which as income rises, demand rises too. Income Inelastic Goods The product is completely insensitive to changes in income Inferior Goods A good is one for which as incomes rise, demands falls Complements Substitutes In the long run In the momentary period

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# Elasticity Presentation

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