Elasticity

Price Elasticity of Demand

a measure of the responsiveness of quantity demanded to a change in the price of the good or service

Ed Formula

Percentage method:
Ed = % change in QTY / % change in $
= coefficient
Midpoint method:
Ed = ^ QTY / QTY average x P average / ^P
= coefficient

Ed Elastic and Inelastic Demand

Elastic - responsive to a price change
- coefficient greater than 1
e.g. inferior goods, bread, clothes
Inelastic - demand is less responsive to a price change
- less than 1 is inelastic
e.g. cigarettes, medicine

Income Elasticity of Demand

refers to the responsiveness of demand to a change in consumer income

Ey Formula

Ey = % change in QTY demanded / % change in income
= coefficient

Ey Elasticity

- income elasticity is either positive or negative
- normal goods have positive coefficients
- inferior goods have a negative coefficient
- often goods that are income elastic are price elastic (luxury items)
- goods income inelastic are price inelastic (

Total Revenue

The total income of a business selling a goods or service

How TR is Affected by Elasticity

- when D is elastic, P and TR move in opposite directions
- rise in P decreases TR
- fall in P increases TR
- when D is inelastic, P and TR move in the same direction
- rise in P increases TR
- fall in P decreases TR

TR Formula

TR = price x quantity