Insights on Price Elasticity of Demand and Consumer Behavior

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„ZPR PWr – Zintegrowany Program Rozwoju Politechniki Wrocławskiej”
 
A measure of the responsiveness of one
variable (quantity demanded or supplied) to a
change in another variable
Most 
popular 
elasticity: price elasticity of
demand, defined as:
 
Price elasticity of demand =
 
usually takes negative values
when
 
price grows, quantity demanded decreases
when price decreases, quantity demanded increases
the
 
exceptions
:
t
he Veblen 
effect
Giffen good
 
The Veblen 
effect
 - 
some types of high-status goods,
such as diamonds or luxury cars, are Veblen goods,
decreasing their prices 
decreases
 people's preference
for buying them because they are no longer perceived
as exclusive or high status products.
A
 price increase may increase that 
high status and
perception of exclusivity
, thereby making the good
even more preferable.
 
T
he classic example given by Marshall is 
staple foods
 of inferior
quality
,
whose demand is driven by poverty
,
 that makes their purchasers
unable to afford superior foodstuffs.
As the price of the cheap staple 
food
 
rises, they can no longer
afford to supplement their diet with better foods, and must
consume more of the staple food.
 
Marshall wrote in the 1895 
in book
 
Principles of Economics
:
As Mr. Giffen has pointed out, a rise in the price of bread makes
so large a drain on the resources of the poorer labouring families
and raises so much the marginal utility of money to them, that
they are forced to curtail their consumption of meat and the
more expensive farinaceous foods: and, bread being still the
cheapest food which they can get and will take, they consume
more, and not less of it.
 
Demand is said to be:
elastic when Ed 
<
 
-
1,
unit elastic when Ed = 
-
1, and
inelastic when Ed 
>-
1.
 
Even small change of price results decreasing
of demand 
to
 zero
Source of graphics (for all slides): http://www.oswego.edu/~kane/eco101.htm
 
Customers buy 
the same amount of good,
regardless of good’s price
 
a price increase from $1 to $2 represents a 100%
increase in price,
a price increase from $2 to $3 represents a 50%
increase in price,
a price increase from $10 to $11 represents a 10%
increase in price.
Not
e
 that, even though the price increases by $1
in each case, the percentage change in price
becomes smaller when the starting value is larger.
 
Source of graphics: http://www.oswego.edu/~kane/eco101.htm
 
 
where:
Δ
Q  - 
change of quantity demanded
Q – 
quantity demanded before price
change
 Δ
P – 
change of price
P – 
price before change
Suppose that quantity demanded falls from
60 to 40 when the price rises from $3 to $5.
The price elasticity of demand equals
 
 
In this interval, demand is inelastic (since elasticity 
>-
 1).
 
Total revenue = price 
times
 quantity
What happens to total revenue if the price
rises?
 
A reduction in price will lead to:
an increase in TR when demand is elastic.
a decrease in TR when demand is inelastic.
an unchanged level of total revenue when
demand is unit elastic.
 
Price elasticity of demand =
 
 
different customers are charged different
prices for the same product, due to
differences in price elasticity of demand
higher prices for those customers who have
the most inelastic demand
 (e.g. rich
customers)
lower prices for those customers who have a
more elastic demand
 (e.g. poor customers)
.
 
Theatres usually 
charge three different prices 
for
a show. The prices target various age groups,
including youth, adults and seniors. 
The prices
fluctuate with the expected income of each age
category
, with the highest charge going to the
adult population.
F
irms selling alcoholic beverages, produce
similar products but try to promote one as a
prestige brand with a much higher price.
Prices for flights are different for average
customer and business customer (business
class).
 
Price elasticity
 
of demand
 is relatively high
when:
close substitutes are available,
the 
good is 
not a 
necessity
,
the good or service is a large share of the
consumer's budget,
a longer time period is considered
,
the customers are rather poor
.
 
Price elasticity
 
of demand
 is relatively 
low
when:
There are no close substitutes (e.g. electricity,
water)
;
Good
 is
 necessit
y;
Customers are rather rich
;
T
he good or service is a 
small
 
share of the
consumer's budget
;
A
 
shorter 
time period is considered
 (no time
to change chabits, to look for substitutes).
 
The cross-price elasticity of demand between
two goods 
j
 and 
k
 is defined as:
 
cross-price elasticity is positive if and only
if the goods are substitutes
cross-price elasticity is negative if and
only if the goods are complements.
 
A good is a normal good if income
elasticity > 0.
A good is an inferior good if income
elasticity < 0.
 
A good is a luxury good if income elasticity
> 1.
A good is a necessity good if income
elasticity < 1.
Note: it concerns the producer
 
Example: land
 
Example: 
?
 
short run
 - period of time in which capital is
fixed
 (constant)
all inputs 
(factors of production) 
are variable
in the 
long run
supply will be more elastic in the long run
than in the short run 
since firms can expand
or contract their capital in the long run
 (e.g.
bring employees from abroad)
.
 
równanie – equation
układ równań - 
simultaneous equations
ułamek – fraction
ułamek piętrowy – compound fraction
malejąca (rosnąca) funkcja – decreasing (increasing) function
funkcja liniowa – linear function
iloraz – quotient
iloczyn – product
różnica – difference
suma – sum
sumowanie – summation
dodatni – positive
ujemny – negative
licznik – numerator
mianownik - denominator
 
Begg D. Fischer S., Dornbusch R., „Economics”,
2008
Czarny B. „Podstawy Ekonomii”, PWE 2010.
http://www.oswego.edu/~kane/eco101.htm
www.wikipedia.org
Wood, John C. (1993). 
Thorstein Veblen: Critical
Assessments
, 352. London
Alfred Marshall, 1895. Principles of Economics
Bk.III,Ch.VI in paragraph III.VI.17
 
Graphics sources:
http://www.oswego.edu/~kane/eco101.htm
 
 
1.
Give
 some examples of goods with
 inelastic
 demand
?
Describe why demand is inelastic for these goods.
2.
Give some examples of goods with
 
very 
elastic
 demand
?
Describe why demand is very elastic for these goods.
3.
What is price discrimination. Give examples.
4.
What is the difference between normal goods, luxury
goods and inferior goods? Give examples.
5.
Make a proof that at the level of price at which  E
pd
=-1
the TR takes maximum value. Assume linear relationship
between P and Q.
6.
What is the inluence of price comparison services on
price elasticity of demand in e-commerce. Give
examples.
7.
Explain why the long run price elasticities of supply are
larger in magnitude when compared with the short-run
price elasticities.
 Give examples.
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Understanding the concept of price elasticity of demand, this content explores how changes in price affect consumers' buying behavior. It covers the Veblen effect, Giffen goods, Marshall's example on staple foods, and the responsiveness of demand to price fluctuations. The content also explains elastic, unit elastic, and inelastic demand, with real-world examples illustrating these concepts.


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  1. ZPR PWr Zintegrowany Program Rozwoju Politechniki Wrocawskiej

  2. film A measure of the responsiveness of one variable (quantity demanded or supplied) to a change in another variable Most popular elasticity: price elasticity of demand, defined as: % _ _ _ change of quantity _ demanded Price elasticity of demand = % _ change of price

  3. usually takes negative values when price grows, quantity demanded decreases when price decreases, quantity demanded increases the exceptions: the Veblen effect Giffen good

  4. The Veblen effect - some types of high-status goods, such as diamonds or luxury cars, are Veblen goods, decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products. A price increase may increase that high status and perception of exclusivity even more preferable. high status and perception of exclusivity, thereby making the good

  5. The classic example given by Marshall is staple foods quality, whose demand is driven by poverty, that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple food rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food. staple foods of inferior Marshall wrote in the 1895 in book Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.

  6. Demand is said to be: elastic when Ed < -1, unit elastic when Ed = -1, and inelastic when Ed >-1.

  7. Even small change of price results decreasing of demand to zero Source of graphics (for all slides): http://www.oswego.edu/~kane/eco101.htm

  8. Customers buy the same amount of good, regardless of good s price

  9. film a price increase from $1 to $2 represents a 100% increase in price, a price increase from $2 to $3 represents a 50% increase in price, a price increase from $10 to $11 represents a 10% increase in price. Note that, even though the price increases by $1 in each case, the percentage change in price becomes smaller when the starting value is larger.

  10. Source of graphics: http://www.oswego.edu/~kane/eco101.htm

  11. Q Q = _ _ _ price elasticity of demand P P where: Q - change of quantity demanded Q quantity demanded before price change P change of price P price before change

  12. Suppose that quantity demanded falls from 60 to 40 when the price rises from $3 to $5. The price elasticity of demand equals In this interval, demand is inelastic (since elasticity >- 1).

  13. Total revenue = price times quantity What happens to total revenue if the price rises? Ticket prices Demand Price elasticity of demand -oo -4 -1,5 -1 -0,67 -0,25 0 Total revenue 12,5 10 7,5 6,25 5,0 2,5 0 0 20 40 50 60 80 100 0 200 300 312,5 300 200 0

  14. % _ _ _ change of quantity _ demanded Price elasticity of demand = % _ change of price A reduction in price will lead to: an increase in TR when demand is elastic. a decrease in TR when demand is inelastic. an unchanged level of total revenue when demand is unit elastic.

  15. film

  16. different customers are charged different prices for the same product, due to differences in price elasticity of demand higher prices for those customers who have the most inelastic demand (e.g. rich customers) lower prices for those customers who have a more elastic demand (e.g. poor customers).

  17. Theatres usually charge three different prices a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age category adult population. Firms selling alcoholic beverages, produce similar products but try to promote one as a prestige brand with a much higher price. Prices for flights are different for average customer and business customer (business class). charge three different prices for The prices fluctuate with the expected income of each age category, with the highest charge going to the

  18. Price elasticity of demand is relatively high when: close substitutes are available, the good is not a necessity, the good or service is a large share of the consumer's budget, a longer time period is considered, the customers are rather poor.

  19. Price elasticity of demand is relatively low when: There are no close substitutes (e.g. electricity, water); Good is necessity; Customers are rather rich; The good or service is a small share of the consumer's budget; A shorter time period is considered (no time to change chabits, to look for substitutes).

  20. The cross-price elasticity of demand between two goods j and k is defined as:

  21. cross-price elasticity is positive if and only if the goods are substitutes cross-price elasticity is negative if and only if the goods are complements.

  22. film A good is a normal good if income elasticity > 0. A good is an inferior good if income elasticity < 0.

  23. A good is a luxury good if income elasticity > 1. A good is a necessity good if income elasticity < 1.

  24. Note: it concerns the producer

  25. Example: land

  26. Example: ?

  27. short run fixed (constant) all inputs (factors of production) are variable in the long run supply will be more elastic in the long run than in the short run or contract their capital in the long run (e.g. bring employees from abroad). short run - period of time in which capital is long run supply will be more elastic in the long run than in the short run since firms can expand

  28. rwnanie equation uk ad r wna - simultaneous equations u amek fraction u amek pi trowy compound fraction malej ca (rosn ca) funkcja decreasing (increasing) function funkcja liniowa linear function iloraz quotient iloczyn product r nica difference suma sum sumowanie summation dodatni positive ujemny negative licznik numerator mianownik - denominator

  29. Begg D. Fischer S., Dornbusch R., Economics, 2008 Czarny B. Podstawy Ekonomii , PWE 2010. http://www.oswego.edu/~kane/eco101.htm www.wikipedia.org Wood, John C. (1993). Thorstein Veblen: Critical Assessments, 352. London Alfred Marshall, 1895. Principles of Economics Bk.III,Ch.VI in paragraph III.VI.17 Graphics sources: http://www.oswego.edu/~kane/eco101.htm

  30. Give some examples of goods with inelastic demand? Describe why demand is inelastic for these goods. Give some examples of goods with very elastic demand? Describe why demand is very elastic for these goods. What is price discrimination. Give examples. What is the difference between normal goods, luxury goods and inferior goods? Give examples. Make a proof that at the level of price at which Epd=-1 the TR takes maximum value. Assume linear relationship between P and Q. What is the inluence of price comparison services on price elasticity of demand in e-commerce. Give examples. Explain why the long run price elasticities of supply are larger in magnitude when compared with the short-run price elasticities. Give examples. 1. 2. 3. 4. 5. 6. 7.

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