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