The quantity demanded increases from 20 to 30 if the price drops from $12 to 6.
If the price goes up from $6 to $12, the quantity demanded goes up from 30 to 20 or goes down from 30 to 20.
Percentage changes are usually calculated by using the initial value as the reference point.
In this example, we used $12 as the starting point and dropped the price to $6, and then used $6 as the starting point and increased the price to $12.
The percentage changes are different even though we are measuring elasticity over the same range of values.
The midpoint method is used to express the price elasticity of demand.
This equation is not complicated like Equation 4.1.
The percentage changes can be determined by plugging in the initial and ending values for price and quantity.
Q1 and P1 are the initial values, and Q2 and Q2 are the ending values.
The change in the quantity demanded, and the change in price, are divided by the average of the initial and ending values.
The preferred method is the midpoint method.
Let's return to our pizza demand example.
If the price goes up from $6 to $12, the quantity demanded goes down from 30 to 20.
The initial values are $6 and 30.
The values are P2 and Q2
If the price goes from $12 to $6, the quantity demands go up from 20 to 30.
The initial values are P1 and Q1 P2 is $6 and Q2 is 30.
The price elasticity of demand was calculated using $6 as the initial point.
The initial reference point was $12 and the ED was -1.0.
The method splits the difference and uses $9 and 25 pizzas.
No matter what direction the price goes, the elasticity coefficients will be the same.
The midpoint method is used by economists to standardize the results.
The elasticity coefficients are between 0 and -1 using the midpoint method.
The percentage change in the quantity demanded is less than the percentage change in the price.
When the percentage change in the quantity demanded is smaller than the percentage change in price, demand is inelastic.
The price drop doesn't change how much pizza consumers buy from the shop.
Demand is elastic when the elasticity coefficients is less than -1, and the opposite is true.
We can see the relationship between elastic and inelastic demand graphically.
The demand curve flattens as demand becomes elastic.
Many pet owners report that they would pay any amount of money to help their sick or injured pet.
The demand curve is a vertical line for these pet owners.
If you look at the quantity axis in panel a, you will see that the amount of pet care demanded remains constant no matter what the cost is.
The flatter demand curve is more elastic than the steeper demand curve when it comes to price changes.
The price does not matter because the demand is inelastic.
The price is less important than the quantity purchased when demand is inelastic.
The price is more important than quantity because the demand is elastic.
The demand is elastic, so price is all that matters.
No matter what we find in the denominator, the answer will be zero.
It makes sense.
The value of ED will always be zero.
To keep track of the different types of elasticity, refer to Table 4.2 on page 123.
Consumers of electricity will modify their use of electricity in response to price changes, unlike pet owners who will not change their consumption of health care for their pet no matter what the cost is.
When the price of electricity goes up, they will use less and when the price goes down, they will use more.
Buying energy efficient light bulbs or adjusting the thermostat are relatively small lifestyle adjustments that can be made to use less electricity.
The demand curve in panel is steep, but not completely vertical as in panel.
The law of demand describes a negative relationship between price and quantity.
The demand for electricity will always be in opposite directions when the price is changed.
The price elasticity of demand must be close to zero when demand is inelastic.
Consider how a 10% increase in electric rates affects most households in the easiest way possible.
Most people would be a little less, but not 10% less.
You can change your thermostat, but you still need electricity.
There is a bigger change in the denominator when the price changes more than quantity.
When demand is relatively inelastic, the price elasticity of demand is between 0 and -1.
The degree of responsiveness we see along the quantity axis is indicative of the flexibility of consumer demand for apples.
The responsiveness can be observed by noting that a relatively elastic demand curve is flatter than an inelastic demand curve.
Inelastic demand shows no change in demand with an increase in price, and relatively inelastic demand shows a small change in demand with an increase in price.
The percentage change in QD is large and the percentage change in P is small.
The demand for apples is elastic.
The elasticity ED is less than -1.
There is a negative relationship between price and quantity demanded, so the sign must be negative.
The consumer becomes more responsive to price changes as the price elasticity of demand moves farther away from zero.
A small change in the price of apples will have a large effect on the demand for apples.
When the price drops to $10.00, you will probably become indifferent, as you will be equally satisfied with paying $10 for the $10 bill or not making the trade.
The magic happens when the price drops to $9.99.
There is a perfectly elastic demand for a $10 bill.
We can think of this small price change as having an unlimited effect on the amount of $10 bills demanded.
When the price drops to $9.99, traders want to buy as many $10 bills as possible.
When ED is exactly -1, it happens when the percent age change in price is exactly the same as the percentage change in quantity demanded.
When we discuss the connection between elasticity and revenue later in the chapter, this characteristic of unitary elasticity will be important.
You might be wondering what an example of a unitary good would be.
It's not possible to find a good that has a price elasticity of -1 at all price points.
It is obvious that unitary demand represents the difference between elastic and inelastic demand.
The letter "E" has three horizontal lines to remind us that demand is flat.
It is possible to pair the elasticity coefficients with an interpretation of how much price matters.
The summary is provided in Table 4.2.
Demand is inelastic when price does not matter.
When price is the only thing that matters, demand becomes elastic.
Between the two extremes, the extent to which price matters determines whether demand is inelastic, unitary, or relatively elastic.
Increased time makes demand elastic.
When the price goes up from P1 to P2 con sumers can't avoid it, and demand is represented by the perfectly inelastic demand curve D1.
If your gas tank is almost empty, you must purchase gas at a higher price.
Consumers are more flexible and drive less in order to buy less gasoline.
In the short run consumption goes down in the second quarter.
The price does not matter.
Price and quantity are equally important.
The price is the most important thing.
Over time, demand becomes elastic.
As a result, the demand curve flattens and the quantity demanded falls to Q3 in response to the higher price.
Q3 Q2 Q1 have time to purchase a more fuel efficient vehicle or move closer to work, demand shifts to D3 and gas purchases fall even further.
The quantity demanded falls as the demand curve flattens.
We want you to understand what you are seeing in the figures.
Slope doesn't equal elasticity.
Consider a trip to Starbucks.
The price of the skinny latte will go from $5 to $4 if you buy it.
A small price change causes you to make the purchase.
The demand for skinny lattes is elastic.
The price elasticity of demand is not always constant, as you can see by the way the price elasticity of demand changes from highly elastic near the top of the demand curve to highly inelastic near the bottom of the curve.
The numbers in the third, fourth, and fifth columns are based on the formula.
At $5 the consumer purchases zero lattes, at $4 she purchases one latte, at $3 she purchases two, and she continues to buy one additional latte with each $1 drop in price.
The price elasticity of demand slowly becomes more inelastic as you progress downward along the demand curve.
The slope of a linear demand curve is constant.
In the change in ED, it decreases from -9.1 to -0.1.
If the elasticity coefficients were zero, there would be perfectly inelastic demand.
A value of zero means that there is no change in the quantity demanded as a result of a price change.
Values close to zero reflect inelastic demand, while values farther away reflect more elastic demand.
Understanding the elasticity of demand for the product you sell is important when running a business.
Consumer responsiveness to price changes determines whether a firm would be better off raising or lowering its price.
The price elasticity of demand and the firm's total revenue are explored in this section.
We need to understand the concept of total revenue.
The table good is calculated by multi from Figure 4.3 and adds the price of the good column for the total revenue.
The total revenue is determined by the quantity of good that is sold.
We can look at the column of elasticity coefficients to determine the relationship after calculating total revenue at each price.
When we link revenues with demand, there is a trade off.
When the price is too high, total revenue is zero.
What happens when the price goes from $5 to $4?
At $4, the first latte is purchased.
The total revenue is $4.
The price elasticity of demand is highly elastic in this range.
Lowering the price increases revenue.
When the price goes from $4 to $3, revenue goes up.
The total revenue increases to $3 with two lattes sold.
Demand is elastic at the same time.
When demand is elastic, lowering the price will increase revenue.
The business has generated more revenue by lowering the price from $4 to $3.
Lowering the price will increase lost revenue in the elastic region.
$5 lowering the price won't increase revenue when demand is unitary.
Lowering the price will decrease revenue by $4 in the inelastic region of $5.
The business has given up $1 for each unit it sells because it has lowered the price from $4 to $3.
The red area under the demand curve shows lost revenue.
The total revenue stays the same when the price goes from $3 to $2.
The result occurs because demand is unitary.
When the percentage price change is offset by an equal percentage change in the quantity demanded, there is a special condition.
Revenue is constant in this situation.
When the price was $3, the total revenue was $2, which is the same as it is now.
We can see that the total revenue has reached a maximum.
The price elasticity of demand is between $3 and $2.
The finding doesn't mean that the firm will operate at the unitary point.
Maximizing profit, not revenue, is the ultimate goal of a business, and we have not yet accounted for costs in our calculation of profits.
Bart came up with the idea of charging admission for people to see the elephant.
Revenue isn't enough to cover Stampy's food bill.
Homer raises the price to see the elephant to $100 when he learns that they aren't covering the costs of keeping Stampy.
The Simpsons can't afford Stampy.
Homer's plan is to stay away.
Our understanding of elasticity doesn't generate revenue.
Bart's admission price of $1 brings Homer's plan to increase the price.
If Stampy's $300 food bill is covered by the demand to see the elephant, egy would work.
Homer is not inelastic.
You could see that it was the right idea for $100.
Raising the price of a concert, attend a major sporting event, or eat at a higher price would generate more revenue.
Would most of the customers be willing to pay $100 for the chance to see the elephant?
The country sees hundreds of other animals as off dictated by the law of demand.
The quantity demanded is reduced by Homer's plan being doomed.
No one is willing to pay $100.
Purchase if the quantity falls to zero.
You are asked to compute price elasticity of demand.
Ask yourself if the price elasticity of demand for sandwiches is elastic.
Question: A deli manager decides to lower the price of a featured sandwich from $3 to $2 and she finds that sales increase from 240 to 480 sandwiches.
Consumers were willing to buy more sandwiches in response to the price drop.
The price elasticity of demand is calculated using Equation 4.2.
The percentage change in the quantity demanded is greater than the percentage change in price if the price elasticity is less than -1, demand is elastic.
The store manager expected this outcome.
There are many other options for a meal, such as salads, burgers, and chicken, which cost more than the now cheaper sandwich.
We should not be surprised by the increase in sandwich purchases by price conscious customers.
A local pharmacy manager decided to raise the price of a 50- pill prescription of amoxicillin from $8 to $10.
Let's take a look at the potential replacements for amoxicillin.
Most patients prefer to use the drug prescribed by their doctor.
The cost of the drug is relatively low.
The need for amoxicillin is a short- run consideration.
We believe that the demand for amoxicillin iselastic because of all three factors.
Let's see if the data supports the intuition.
We suspected that the price elasticity of demand is high because of the ED near zero.
The price increase won't cause consumption to fall very much.
The store manager's plan to bring in more revenue from the sales of amoxicillin is a success.
The business sold 1,500 units for $8 before the price increase.
After the price increase, sales decrease to 1,480 units, but the new price is $10, so total revenue is now $14,800.
The pharmacy made an additional $2,800 in revenue by raising the price of amoxicillin.
We move into the realm of inelastic demand once we reach a price below unitary demand.
When the price goes to $1, revenue goes to $4.
The price elasticity of demand is relatively inelastic.
As you can see by the blue square, even though the price is going down, it doesn't make a big difference.
At a price of $2, three units are sold and the total revenue is $2.
Four units are sold when the price is $1, so the total revenue is $4.
The business has lost $2 in extra revenue because it doesn't generate enough extra revenue from the lower price.
The red boxes show the loss in existing sales revenue caused by lowering the price from $2 to $1.
The blue box only generated $1 in new sales.
When the demand curve enters the inelastic area, lowering the price decreases revenue.
This outcome is bad for a business.
The business has to produce more goods because of the lower price.
It doesn't make sense to lower prices in the region where revenues decline because making goods is costly.
No business will operate in the inelastic region of the demand curve.
Determining the price elasticity of demand for a product or service involves calculating the responsiveness of quantity demanded to a change in the price.
The chart shows the elasticity of demand for ten products and services.
The number is always negative because of the negative relationship between price and quantity demanded.
It allows businesses to have better pricing strategies.
Consumer demand responds to changes in the price of a single good.
In this section, we look at how responsive demand is to income and price changes.
Consumer spending can be affected by changes in personal income.
The types of purchases you make and how much you spend are influenced by the money in your pocket.
Someone with a little extra cash can afford to upgrade from a cheap generic product to a more expensive one, for example.
Different shoppers' budgets are reflected in the grocery store aisle.
Store brands and name products are competing for shelf space.
It's calculated by dividing spending.
The income elasticity of demand can be positive or negative.
They have a positive income elasticity because the demand for normal goods increases with income.
If you receive a 20% pay raise and decide to pay an extra 10% on your cable TV bill, the resulting income elasticity is positive, because 10% divided by 20% is 0.5.
When a good is normal, the result is a positive income elasticity of demand and purchases of the good rise and fall at the same time.
Goods with income elasticities between 0 and 1 are considered necessities.
Consumers at any income level must buy clothing, electricity, and gasoline no matter what, because expenditures on items such as clothing, electricity, and gasoline are unavoidable.
As income increases, purchases of necessities do not rise as fast as they did before.
Spending on necessities will expand at a slower rate as income increases.
Income elasticity of demand is created when rising income allows consumers to enjoy more luxuries.