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Price, Income, Advertising and Cross Elasticity
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Elasticity – the concept
• The responsiveness of one variable to changes in another • When price rises, what happens to demand? • Demand falls • BUT! • How much does demand fall?
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Elasticity – the concept
• If price rises by 10% what happens to demand? • We know demand will fall • By more than 10%? • By less than 10%? • Elasticity measures the extent to which demand will change
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Elasticity
• • • • • 4 basic types used: Price elasticity of demand Advertising elasticity of demand Income elasticity of demand Cross elasticity
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Elasticity
• Price Elasticity of Demand
– The responsiveness of demand to changes in price – Where % change in demand is greater than % change in price – elastic – Where % change in demand is less than % change in price inelastic
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Elasticity
The Formula: Ped = % Change in Quantity Demanded ___________________________ % Change in Price
If answer is between 0 and 1: the relationship is inelastic If the answer is between 1 and infinity: the relationship is elastic Note: PED has – sign in front of it; because as price rises demand falls and viceversa (inverse relationship between price and demand)
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Price (£)
Elasticity
The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded.
Quantity Demanded
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Elasticity
Price
Total revenue is price x quantity The importance of elasticity is sold. In this example, TR = £5 x the information it provides on 100,000 = £500,000....