# MANAGERIAL ECONOMICS Price Elasticity of Demand

May 20th, 2015
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In this chapter we look at the idea of elasticity of demand, in other words, how sensitive is the demand for a product to a change in the product’s own price. You will find that elasticity of demand is perhaps one of the most important concepts to understand in your AS economics course

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MANAGERIAL ECONOMICSPrice Elasticity of DemandIn this chapter we look at the idea of elasticity of demand, in other words, how sensitive is the demand for a product to a change in the products own price. You will find that elasticity of demand is perhaps one of the most important concepts to understand in your AS economics courseDefining elasticity of demandPed measures the responsiveness of demand for a product following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is:Percentage change in quantity demanded divided by the percentage change in priceSince changes in price and quantity nearly always move in opposite directions, economists usually do not bother to put in the minus sign. We are concerned with the co-efficient of elasticity of demand.Understanding values for price elasticity of demandIf Ped = 0 then demand is said to be perfectly inelastic. This means that demand does not change at all when the price changes the demand curve will be vertical If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. Producers know that the change in demand will be proportionately smaller than the percentage change in price If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in de

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