Elastic Demand

Only available on StudyMode
  • Download(s) : 282
  • Published : March 10, 2013
Open Document
Text Preview
ELASTIC DEMAND
Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price, i.e. when: Percentage change in the quantity demanded > 1
Percentage change in the price

Example

A fall in the price of cotton in Antigua and Barbuda from $20 to $18 causes the quantity demanded to increase from units to 150 units

In the figure above, the price range $20 to $18, demand is elastic.

Percentage change in the quantity demanded = = = 50%
Percentage change in the price = = = 10%

Elasticity of demand = = 5

Therefore, in the price range $20 to $18, the demand is elastic. What happens to total revenue?

When the price is $20 total revenue = $20 x 100 = $2,500
When the price is $18 total revenue = $18 x 150 = $2 704

So when demand is elastic:

* A fall in price increases total revenue, and
* A rise in price reduces total revenue.

The figure below shows Perfect Elasticity/Infinity or infinitely elastic
PED = ∞
At a certain price demand is unending. If there is a small increase in price, the quantity demanded would fall from such a large amount to zero.
Fairly Elastic Demand (as shown in the figure below)

A fairly elastic demand curve is where PED is greater than 1 but less than infinity. The change in price brought about a greater change in the quantity demanded, reflecting that the price elasticity of demand is elastic. The increase of price from P to P1 caused a decrease in quantity demanded from Q1 to Q2. As denoted by the arrows, the change in price is smaller than the change in quantity demanded. Inelastic Demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, i.e. when: Percentage change in the quantity demanded < 1
Percentage change in the price
EXAMPLE
A rise in the price of crayfish in The Bahamas from$4 to $6 causes the quantity demanded to fall from...
tracking img