Name: Elasticity of Demand
Brand: EduBirdie
Rating: 5.0 (27 reviews)

University:
London School of Economics and Political Science
Course:
L400 | International Social and Public Policy
Academic year:

2022
Views:

492

Pages:

3
Author:

Prerna T

ELASTICITY OF DEMAND Elasticity of demand measures the responsiveness of demand to a change in a variable which affects demand 1. PRICE ELASTICITY OF DEMAND (PED) PED% change in quantity demanded % change in the good's own price If the PED is greater than one, the good is price elastic. Demand is highly responsive to a change in price. PED > 1 - ELASTIC If the PED is less than one, the good is inelastic. Demand is not very responsive to changes in price PED 1 Demand tends to be price elastic when the marginal revenue curve (MR) is positive. At the point when MR is zero the price elasticity of demand is equal to one. It is inelastic when marginal revenue is negative. Here, a fall in price, although causing an increase in demand, actually reduces the total revenue of producers. PED-1 PED< D MR Q The Relationship Between Total Revenue And Price Elasticity It is important for producers to know the PED of their output when making pricing decisions. When demand is price inelastic a rise in price will cause a rise in total spending on the good. When a good is price elastic a rise in price will cause a fall in total spending on the good. Diagram 1.12 Price Diagram 1.13 Price PI -Gain r Loss PI D Οι Q Q QI In Diagram 1.12, the rise in price results in an increase in total revemie (PxQ) because the area of gain exceeds the area of loss. th because

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