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# Price elasticity of demand

- Intro Lesson: a1:33
- Intro Lesson: b12:35
- Intro Lesson: c5:10
- Intro Lesson: d7:38
- Intro Lesson: e8:44

### Price elasticity of demand

#### Lessons

__Definition for Elasticity__Elasticity helps us analyze supply and demand with great precision and shows us how buyers and sellers respond to change.

*Price Elasticity of Demand =*$\frac{\% \;change \;in \;quantity \;of \;demand}{\% \;change \;in \;price}$

The elasticity of demand measures the responsiveness of the quantity demanded to a change in the good.

__Formulas for Price Elasticity of Demand__Using the formula above, there are two ways to calculate price elasticity of demand.

**First Way:** Point Elasticity of Demand

*Point Elasticity of Demand =*$\frac{(Q_{2}-Q_{1})/Q_{1}}{(P_{2}-P_{1})/P_{1}}$

**Second Way:** Arc Elasticity of Demand

*Arc Elasticity of Demand =*$\frac{(Q_{2}-Q_{1})/Q_{avg}}{(P_{2}-P_{1})/P_{avg}}$

Where $Q_{avg}$ = $\frac{Q_{1}+ Q_2 } {2}$ and $P_{avg}$ = $\frac{P_{1}+ P_2 } {2}$

Ignore the negative sign when calculating the elasticity, it is unimportant.

__Notes about Price Elasticity of Demand__**Average Price and Quantity:** We use average price and quantity when applying the arc elasticity of demand formula because we get the same elasticity value regardless of whether the price rises or falls. It is also more accurate.

**Percentages and Proportions:** The ratio of two proportionate changes is the same as the ratio of two percentage changes.

**Units-Free Measure:** Since Elasticity uses percentages, the change in the units of measurement of price and quantity does not matter.

__Types of Elasticities__**Inelastic Demand:**Quantity demanded does not respond strongly to price changes.

**Elastic Demand:**Quantity demanded responds strongly to price changes.

**Unit Elastic Demand:**Quantity demanded responds equally to price changes.

Mathematically, if:

- $\in_{p}$ > 1, then it is elastic, and 1% Change in P results in greater than 1% Change in Q
- $\in_{p}$ < 1, then it is inelastic, and 1% Change in P results in less than 1% Change in Q
- $\in_{p}$ = 1, then it is unit elastic, and 1% Change in P = 1% Change in Q

**Two Unique Cases of Demand Curves**

**Case 1:** If a demand curve is *perfectly inelastic*, then the quantity demanded does not respond to price changes.

**Case 2:** If a demand curve is *perfectly elastic*, then the quantity demanded changes infinitely with any price changes.

__Total Revenue and Price Elasticity of Demand__Total Revenue = Quantity × Price

- If demand is elastic, then 1% price cut increases the quantity sold by more than 1%. This causes revenues to increase.
- If demand is inelastic, then 1% price cut increases the quantity sold by less than 1%. This causes the revenue to decrease.
- If demand is unit elastic, then 1% price cut increase the quantity sold by 1%. This does not change the revenue.

The goal is to always have unit elastic demand.

- Introduction
**Price Elasticity of Demand Overview:**a)__Definition for Elasticity__- Analyze supply and demand with good precision
- How buyers and sellers respond to change
- Price Elasticity of Demand
- Why is it important

b)__Formulas for Price Elasticity of Demand__- Two ways to calculate Elasticity of Demand
- Point Elasticity of Demand
- Arc Elasticity of Demand
- An Example of using both

c)__Notes about Price Elasticity of Demand__- Why use average price and quantity?
- Percentages and Proportions
- Units-Free Measure

d)__Types of Demand Curves__- Inelastic demand and elastic demand
- What each value of elasticity means
- Perfectly inelastic, perfectly elastic, unit elastic

e)__Total Revenue and Price Elasticity of Demand__- How to calculate total revenue
- How revenue changes in an inelastic demand
- How revenue changes in an elastic demand
- How revenue changes in a unit elastic demand