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P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P e rc e n ta g e c h a n g e in p ric e
Suppose
the price of ice-cream increases by 10%, and
the quantity demanded decreases by 20%.
$2.00
$2.20
2.20 2.00 = $0.20
[(2.20 2.00)/2.00] 100 = 10%
4
10
8
8 10 = 2
[(8 10)/10] 100 = 20%
5
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P e rc e n ta g e c h a n g e in p ric e
2
( 2 .2 0 2 .0 0 )
100 10%
2 .0 0
(Q 2 Q 1) / [(Q 2 Q 1) / 2 ]
P ric e e la s tic ity o f d e m a n d =
(P 2 P 1 ) / [(P 2 P 1 ) / 2 ]
(1 0 8 )
22%
(1 0 8 ) / 2
2 .3 2
( 2 .2 0 2 .0 0 )
9 .5 %
( 2 .0 0 2 .2 0 ) / 2
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P ric e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e in p ric e
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P e rc e n ta g e c h a n g e in p ric e
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P ric e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e in p ric e
Price
$5
4
(4.00 5.00)/2
67 percent
-3
- 22 percent
Demand
50
(4.00 - 5.00)
(100 50)/2
100 Quantity
100
Quantity
$5
4
1. A 22%
increase
in price . . .
Demand
90
100
Quantity
$5
4
Demand
1. A 22%
increase
in price . . .
80
100
Quantity
$5
4
Demand
1. A 22%
increase
in price . . .
50
100
Quantity
Demand
2. At exactly $4,
consumers will
buy any quantity.
0
3. At a price below $4,
quantity demanded is infinite.
Quantity
$4
P Q = $400
(revenue)
Demand
100
Q
Quantity
+10%
- 4%
Price increases by
10%, and
Quantity demanded
decreases by 4%.
24
+10%
- 25%
Price increases by
10%, and
Quantity demanded
decreases by 25%.
25
+10%
- 10%
Price increases by
10%, and
Quantity demanded
decreases by 10%.
26
32
Suppose:
income increases 10%, and
quantity demanded decreases 20%. Then
income elasticity of demand is -20/+10 = -2.
Income Elasticity
Normal Goods: IED > 0
Inferior Goods: IED < 0
Higher income raises the quantity
demanded for normal goods but lowers
the quantity demanded for inferior
goods.
Examples
2. Consumers
feel richer
3. Consumption of Coke
and other goods
increases, but only a little,
because IED is small
4. So, a decrease in the
price of Coke leads to a
small increase in the
consumption of Coke
Clothes
Coke
Books
Movies
Pepsi
39
2. Consumers
feel richer
3. Consumption of Coke
and other goods increases
by a big amount, because
IED is large
4. So, a decrease in the
price of Coke leads to a
big increase in the
consumption of Coke
Clothes
Coke
Books
Movies
Pepsi
40
100
Quantity
100
110
Quantity
100
125
Quantity
100
200
Quantity
Supply
2. At exactly $4,
producers will
supply any quantity.
0
3. At a price below $4,
quantity supplied is zero.
Quantity
Time period.
Supply is more elastic in the long run.
53
54
55