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{{Distinguish|Price elasticity of supply}}


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'''Price elasticity of demand''' ('''PED''' or '''E<sub>d</sub>''') is a measure used in economics to show the responsiveness, or [[elasticity (economics)|elasticity]], of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price ([[ceteris paribus]], i.e. holding constant all the other determinants of demand, such as income). It was devised by [[Alfred Marshall]].
 
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the [[law of demand]], such as [[Veblen good|Veblen]] and [[Giffen good]]s, have a positive PED. In general, the demand for a good is said to be ''inelastic'' (or ''relatively inelastic'') when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be ''elastic'' (or ''relatively elastic'') when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.
 
Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can also be used to predict the [[incidence of tax|incidence (or "burden") of a tax]] on that good. Various research methods are used to determine price elasticity, including [[Marketing research|test market]]s, analysis of historical sales data and [[Conjoint analysis (in marketing)|conjoint analysis]].
 
==Definition==
It is a measure of responsiveness of the quantity of a raw good or service demanded to changes in its price.<ref name="Png57">Png, Ivan (1989). p.57.</ref> The formula for the coefficient of price elasticity of demand for a good is:<ref>Parkin; Powell; Matthews (2002). pp.74-5.</ref><ref name="Gillespie43">Gillespie, Andrew (2007). p.43.</ref><ref name="Gwartney425">Gwartney, Yaw Bugyei-Kyei.James D.; Stroup, Richard L.; Sobel, Russell S. (2008). p.425.</ref>
 
:<math>e_{\langle R \rangle} = \frac{\operatorname d Q/Q}{\operatorname d P/P}</math>
 
The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the "law of demand".<ref name="Gillespie43"/> For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are [[Veblen good|Veblen]] and [[Giffen good|Giffen]] goods.<ref name="Gillespie2007">Gillespie, Andrew (2007). p.57.</ref> Because the PED is negative for the vast majority of goods and services, however, economists often refer to price elasticity of demand as a positive value (i.e., in [[absolute value]] terms).<ref name="Gwartney425"/>
 
This measure of elasticity is sometimes referred to as the ''own-price'' elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a [[complementary good|complementary]] or [[substitute good]].<ref name="Png57"/> The latter type of elasticity measure is called a [[Cross-price elasticity of demand|''cross''-price elasticity of demand]].<ref>Ruffin; Gregory (1988). p.524.</ref><ref>Ferguson, C.E. (1972). p.106.</ref>
 
As the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above ''decreases'' for a combination of two reasons.  First, the PED for a good is not necessarily constant; as explained below, PED can vary at different points along the [[demand curve]], due to its percentage nature.<ref>Ruffin; Gregory (1988). p.520</ref><ref>McConnell; Brue (1990). p.436.</ref> Elasticity is not the same thing as the [[slope]] of the demand curve, which is dependent on the units used for both price and quantity.<ref name="parkin75"/><ref>McConnell; Brue (1990). p.437</ref> Second, percentage changes are not symmetric; instead, the [[Percentage#Percentage increase and decrease|percentage change]] between any two values depends on which one is chosen as the starting value and which as the ending value. For example, if quantity demanded increases ''from'' 10 units ''to'' 15 units, the percentage change is 50%, i.e., (15 − 10) ÷ 10 (converted to a percentage).  But if quantity demanded decreases ''from'' 15 units ''to'' 10 units, the percentage change is −33.3%, i.e., (10 − 15)&nbsp;÷&nbsp;15.<ref name="Ruffin">Ruffin; Gregory (1988). pp.518-519.</ref><ref name="Ferguson">Ferguson, C.E. (1972). pp.100-101.</ref>
 
Two alternative elasticity measures avoid or minimise these shortcomings of the basic elasticity formula:  ''point-price elasticity'' and ''arc elasticity''.
 
===Point-price elasticity===
One way to avoid the accuracy problem described above is to minimise the difference between the starting and ending prices and quantities. This is the approach taken in the definition of ''point-price'' elasticity, which uses [[differential calculus]] to calculate the elasticity for an infinitesimal change in price and quantity at any given point on the demand curve:&nbsp;<ref name="sloman">Sloman, John (2006). p.55.</ref>
:<math>E_d = \frac{P}{Q_d}\times\frac{dQ_d}{dP}</math>
 
In other words, it is equal to the absolute value of the first derivative of quantity with respect to price (dQ<sub>d</sub>/dP) multiplied by the point's price (P) divided by its quantity (Q<sub>d</sub>).<ref name="Wessels2000">Wessels, Walter J. (2000). p. 296.</ref>
 
In terms of partial-differential calculus, point-price elasticity of demand can be defined as follows:<ref>Mas-Colell; Winston; Green (1995).</ref> let <math>\displaystyle x(p,w)</math> be the demand of goods <math>x_1,x_2,\dots,x_L</math> as a function of parameters price and wealth, and let <math>\displaystyle x_l(p,w)</math> be the demand for good <math>\displaystyle l</math>. The elasticity of demand for good <math>\displaystyle x_l(p,w)</math> with respect to price <math>p_k</math> is
 
:<math>E_{x_l,p_k} = \frac{\partial x_l(p,w)}{\partial p_k}\cdot\frac{p_k}{x_l(p,w)}  = \frac{\partial \log x_l(p,w)}{\partial \log p_k}</math>
However, the point-price elasticity can be computed only if the formula for the [[Demand schedule|demand function]], <math>Q_d = f(P)</math>, is known so its derivative with respect to price, <math>{dQ_d/dP}</math>, can be determined.
 
===Arc elasticity===
A second solution to the asymmetry problem of having a PED dependent on which of the two given points on a demand curve is chosen as the "original" point and which as the "new" one is to compute the percentage change in P and Q relative to the ''average'' of the two prices and the ''average'' of the two quantities, rather than just the change relative to one point or the other.  Loosely speaking, this gives an "average" elasticity for the section of the actual demand curve—i.e., the ''arc'' of the curve—between the two points. As a result, this measure is known as the ''[[arc elasticity]]'', in this case with respect to the price of the good. The arc elasticity is defined mathematically as:<ref name="Ferguson"/><ref name="wall">Wall, Stuart; Griffiths, Alan (2008). pp.53-54.</ref><ref name="McConnell; Brue">McConnell;Brue (1990). pp.434-435.</ref>
 
:<math>E_d = \frac{\frac{P_1 + P_2}{2}}{\frac{Q_{d_1} + Q_{d_2}}{2}}\times\frac{\Delta Q_d}{\Delta P} = \frac{P_1 + P_2}{Q_{d_1} + Q_{d_2}}\times\frac{\Delta Q_d}{\Delta P}</math>
 
This method for computing the price elasticity is also known as the "midpoints formula", because the average price and average quantity are the coordinates of the midpoint of the straight line between the two given points.<ref name="Ruffin"/><ref name="McConnell; Brue"/> This formula is an application of the [[midpoint method]]. However, because this formula implicitly assumes the section of the demand curve between those points is linear, the greater the curvature of the actual demand curve is over that range, the worse this approximation of its elasticity will be.<ref name="wall" /><ref>Ferguson, C.E. (1972). p.101n.</ref>
 
==History==
[[File:Marshall PED.png|thumb|right|The illustration that accompanied Marshall's original definition of PED, the ratio of PT to Pt]]
 
Together with the concept of an economic "elasticity" coefficient, [[Alfred Marshall]] is credited with defining PED ("elasticity of demand") in his book ''[[Principles of Economics (Marshall)|Principles of Economics]]'', published in 1890.<ref>Taylor, John (2006). p.93.</ref> He described it thus: "And we may say generally:— the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price".<ref>Marshall, Alfred (1890). III.IV.2.</ref> He reasons this since "the only universal law as to a person's desire for a commodity is that it diminishes... but this diminution may be slow or rapid. If it is slow... a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case... the elasticity of his wants, we may say, is great. In the latter case... the elasticity of his demand is small."<ref>Marshall, Alfred (1890). III.IV.1.</ref> Mathematically, the Marshallian PED was based on a point-price definition, using differential calculus to calculate elasticities.<ref>Schumpeter, Joseph Alois; Schumpeter, Elizabeth Boody (1994). p. 959.</ref>
 
==Determinants==
The overriding factor in determining PED is the willingness and ability of consumers after a price change to postpone immediate consumption decisions concerning the good and to search for substitutes ("wait and look").<ref name="Negbennebor, Microeconomics 2001">Negbennebor (2001).</ref> A number of factors can thus affect the elasticity of demand for a good:<ref name="parkin">Parkin; Powell; Matthews (2002). pp.77-9.</ref>
* '''Availability of [[substitute good]]s:''' the more and closer the substitutes available, the higher the elasticity is likely to be, as people can easily switch from one good to another if an even minor price change is made;<ref name="parkin"/><ref name="illinois"/><ref name=GoodwinNelsonAckermanWeisskopf>Goodwin, Nelson, Ackerman, & Weisskopf (2009).</ref> There is a strong substitution effect.<ref name="Frank">Frank (2008) 118.</ref> If no close substitutes are available, the substitution effect will be small and the demand inelastic.<ref name="Frank" />
* '''Breadth of definition of a good:''' the broader the definition of a good (or service), the lower the elasticity. For example, Company X's fish and chips would tend to have a relatively high elasticity of demand if a significant number of substitutes are available, whereas food in general would have an extremely low elasticity of demand because no substitutes exist.<ref name="Gillespie48">Gillespie, Andrew (2007). p.48.</ref>
* '''Percentage of income:''' the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost;<ref name="parkin"/><ref name="illinois">{{cite web|url=http://my.ilstu.edu/~mswalber/ECO240/Tutorials/Tut04/Tutorial04a.html|title=Tutorial 4a|first=Mark|last=Walbert|accessdate=27 February 2010}}</ref> The income effect is substantial.<ref name="Frank_a">Frank (2008) 119.</ref> When the goods represent only a negligible portion of the budget the income effect will be insignificant and demand inelastic,<ref name="Frank_a" />
* '''Necessity:''' the more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of [[insulin]] for those that need it.<ref name="parkin75"/><ref name="illinois"/>
* '''Duration:''' for most goods, the longer a price change holds, the higher the elasticity is likely to be, as more and more consumers find they have the time and inclination to search for substitutes.<ref name="parkin"/><ref name=GoodwinNelsonAckermanWeisskopf/> When fuel prices increase suddenly, for instance, consumers may still fill up their empty tanks in the short run, but when prices remain high over several years, more consumers will reduce their demand for fuel by switching to [[carpool]]ing or public transportation, investing in vehicles with greater [[Fuel economy in automobiles|fuel economy]] or taking other measures.<ref name="illinois"/> This does not hold for [[consumer durable]]s such as the cars themselves, however; eventually, it may become necessary for consumers to replace their present cars, so one would expect demand to be less elastic.<ref name="illinois"/>
* '''[[Brand loyalty]]:''' an attachment to a certain brand—either out of tradition or because of proprietary barriers—can override sensitivity to price changes, resulting in more inelastic demand.<ref name="Gillespie48"/><ref name="png62">Png, Ivan (1999). p.62-3.</ref>
* '''Who pays:''' where the purchaser does not directly pay for the good they consume, such as with corporate expense accounts, demand is likely to be more inelastic.<ref name="png62"/>
 
==Interpreting values of price elasticity coefficients==
[[File:Elasticity-inelastic.png|right|thumb|Perfectly inelastic demand<ref name="parkin75"/>]]
[[File:Elasticity-elastic.png|right|thumb|Perfectly elastic demand<ref name="parkin75"/>]]
 
Elasticities of demand are interpreted as follows:<ref name="parkin75">Parkin; Powell; Matthews (2002). p.75.</ref>
{| class="wikitable"
|-
! Value
! Descriptive Terms
|-
| <math>E_d = 0 </math>
| Perfectly inelastic demand
|-
| <math> - 1 < E_d < 0 </math>
| Inelastic or relatively inelastic demand
|-
| <math> E_d=  - 1 </math>
| Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand
|-
| <math> - \infty < E_d < - 1 </math>
| Elastic or relatively elastic demand
|-
| <math> E_d = -\infty </math>
| Perfectly elastic demand
|}
 
A decrease in the price of a good normally results in an increase in the quantity demanded by consumers because of the [[law of demand]], and conversely, quantity demanded decreases when price rises.  As summarized in the table above, the PED for a good or service is referred to by different descriptive terms depending on whether the elasticity coefficient is greater than, equal to, or less than −1.  That is, the demand for a good is called:
*''relatively inelastic'' when the percentage change in quantity demanded is ''less than'' the percentage change in price (so that E<sub>d</sub> > - 1);
*''unit elastic, unit elasticity, unitary elasticity'', or ''unitarily elastic'' demand when the percentage change in quantity demanded is ''equal to'' the percentage change in price (so that E<sub>d</sub> = - 1); and
*''relatively elastic'' when the percentage change in quantity demanded is ''greater than'' the percentage change in price (so that E<sub>d</sub> < - 1).<ref name="parkin75"/>
 
As the two accompanying diagrams show, ''perfectly elastic'' demand is represented graphically as a horizontal line, and ''perfectly inelastic'' demand as a vertical line. These are the ''only'' cases in which the PED and the slope of the demand curve (''∆P/∆Q'') are ''both'' constant, as well as the ''only'' cases in which the PED is determined solely by the slope of the demand curve (or more precisely, by the ''inverse'' of that slope).<ref name="parkin75"/>
 
==Effect on total revenue==
{{See also|Total revenue test}}
 
[[File:Price elasticity of demand and revenue.svg|right|thumb|A set of graphs shows the relationship between demand and total revenue (TR) for a linear demand curve. As price decreases in the elastic range, TR increases, but in the inelastic range, TR decreases. TR is maximised at the quantity where PED = 1.]]
A firm considering a price change must know what effect the change in price will have on total revenue. Revenue is simply the product of unit price times quantity:
 
:<math> \mbox{Revenue} = PQ_d</math>
 
Generally any change in price will have two effects:<ref>Krugman, Wells (2009). p.151.</ref>
* the ''price effect'' : For inelastic goods, an increase in unit price will tend to increase revenue, while a decrease in price will tend to decrease revenue. (The effect is reversed for elastic goods.)
* the ''quantity effect'' : an increase in unit price will tend to lead to fewer units sold, while a decrease in unit price will tend to lead to more units sold.
 
For inelastic goods, because of the inverse nature of the relationship between price and quantity demanded (i.e., the law of demand), the two effects affect total revenue in opposite directions. But in determining whether to increase or decrease prices, a firm needs to know what the net effect will be. Elasticity provides the answer: The percentage change in total revenue is approximately equal to the percentage change in quantity demanded plus the percentage change in price.  (One change will be positive, the other negative.)<ref>Goodwin, Nelson, Ackerman & Weisskopf (2009). p.122.</ref> The percentage change in quantity is related to the percentage change in price by elasticity: hence the percentage change in revenue can be calculated by knowing the elasticity and the percentage change in price alone.
 
As a result, the relationship between PED and total revenue can be described for any good:<ref>Gillespie, Andrew (2002). p.51.</ref><ref name="Arnold2008">Arnold, Roger (2008). p. 385.</ref>
* When the price elasticity of demand for a [[Good (economics and accounting)|good]] is ''perfectly inelastic'' (E<sub>d</sub> = 0), changes in the price do not affect the quantity demanded for the good; raising prices will always cause total revenue to increase. Goods necessary to survival can be classified here; a rational person will be willing to pay anything for a good if the alternative is death. For example, a person in the desert weak and dying of thirst would easily give all the money in his wallet, no matter how much, for a bottle of water if he would otherwise die. His demand is not contingent on the price.
* When the price elasticity of demand for a good is ''relatively inelastic'' (-1 < E<sub>d</sub> < 0), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue rises, and vice versa.
* When the price elasticity of demand for a good is ''unit (or unitary) elastic'' (E<sub>d</sub> = 1), the percentage change in quantity is equal to that in price, so a change in price will not affect total revenue.
* When the price elasticity of demand for a good is ''relatively elastic'' ( -∞ < E<sub>d</sub> < -1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue falls, and vice versa.
* When the price elasticity of demand for a good is ''perfectly elastic'' (E<sub>d</sub> is − '''[[Infinity (mathematics)|∞]]'''), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue falls to zero. This situation is typical for goods that have their value defined by law (such as fiat currency); if a 5 dollar bill were sold for anything more than 5 dollars, nobody would buy it, so demand is zero.
 
Hence, as the accompanying diagram shows, total revenue is maximized at the combination of price and quantity demanded where the elasticity of demand is unitary.<ref name="Arnold2008"/>
 
It is important to realize that price-elasticity of demand is ''not'' necessarily constant over all price ranges.  The linear demand curve in the accompanying diagram illustrates that changes in price also change the elasticity: the price elasticity is different at every point on the curve.
 
==Effect on tax incidence==
[[File:Tax incidence (mixed).svg|thumb|right|When demand is more inelastic than supply, consumers will bear a greater proportion of the tax burden than producers will.]]
{{Main|tax incidence}}
PEDs, in combination with [[price elasticity of supply]] (PES), can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is ''perfectly inelastic'', by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant.  Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety. In the opposite case, when demand is ''perfectly elastic'', by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero.  As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.<ref name="wall57">Wall, Stuart; Griffiths, Alan (2008). pp.57-58.</ref>
 
In practice, demand is likely to be only ''relatively'' elastic or relatively inelastic, that is, somewhere between the extreme cases of perfect elasticity or inelasticity. More generally, then, the ''higher'' the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more ''inelastic'' the demand compared to PES, the heavier the burden on consumers.  The general principle is that the party (i.e., consumers or producers) that has ''fewer'' opportunities to avoid the tax by switching to alternatives will bear the ''greater'' proportion of the tax burden.<ref name="wall57"/> In the end the whole tax burden is carried by individual households since they are the ultimate owners of the means of production that the firm utilises (see Circular flow of income).
 
==Optimal pricing==
 
Among the most common applications of price elasticity is to determine prices that maximize revenue or profit.
 
===Constant elasticity and optimal pricing===
 
If one point elasticity is used to model demand changes over a finite range of prices, elasticity is implicitly assumed constant with respect to price over the finite price range. The equation defining price elasticity for one product can be rewritten (omitting secondary variables) as a linear equation.
 
:<math>LQ = K + E \times LP</math>
where
 
:<math>LQ = ln(Q), LP = ln(P), E</math> is the elasticity, and <math>K</math> is a constant.
 
Similarly, the equations for cross elasticity for n products can be written as a set of n simultaneous linear equations.
 
:<math>LQ _l = K_l + E_{l,k} \times LP^k</math>
where
:<math>l</math> and <math>k= 1 ... n , LQ_l = ln(Q_l), LP^l =ln(P^l)</math>, and <math>K_l</math> are constants; and appearance of a letter index as both an upper index and a lower index in the same term implies summation over that index.
 
This form of the equations shows that point elasticities assumed constant over a price range cannot determine what prices generate maximum values of <math>ln(Q)</math>; similarly they cannot  predict prices that generate maximum <math>Q</math> or maximum revenue.
 
Constant elasticities can predict optimal pricing only by computing point elasticities at several points, to determine the price at which point elasticity equals -1 (or, for multiple products, the set of prices at which the point elasticity matrix is the negative identity matrix).
 
===Non-constant elasticity and optimal pricing===
 
If the definition of price elasticity is extended to yield a quadratic relationship between demand units (<math>Q</math>) and price, then it is possible to compute prices that maximize <math>ln(Q)</math>, <math>Q</math>, and revenue. The fundamental equation for one product becomes
 
:<math>LQ = K + E_1 \times LP + E_2 \times LP^2 </math>
 
and the corresponding equation for several products becomes
 
:<math>LQ _l = K_l + E1_{l,k} \times LP^k + E2_{l,k} \times (LP^k)^2</math>
 
Excel models are available that compute constant elasticity, and use non-constant elasticity to estimate prices that optimize revenue or profit for one product<ref name="Mshtprice1">{{cite web|url=http://templates.modelsheetsoft.com/modelsheettemplates/product-price-elasticity-templates.aspx|title=Pricing Tests and Price Elasticity for one product}}</ref> or several products.<ref name="Mshtprice2">{{cite web|url=http://templates.modelsheetsoft.com/modelsheettemplates/price-elasticity-templates.aspx|title=Pricing Tests and Price Elasticity for several  products}}</ref>
 
===Limitations of revenue-maximizing and profit-maximizing pricing strategies===
 
In most situations, revenue-maximizing prices are not profit-maximizing prices. For example, if variable costs per unit are nonzero (which they almost always are), then a more complex computation of a similar kind yields prices that generate optimal profits.
 
In some situations, profit-maximizing prices are not an optimal strategy. For example, where scale economies are large (as they often are), capturing market share may be the key to long-term dominance of a market, so maximizing revenue or profit may not be the optimal strategy.
 
==Selected price elasticities==
Various research methods are used to calculate price elasticities in real life, including analysis of historic sales data, both public and private, and use of present-day surveys of customers' preferences to build up [[marketing research|test markets]] capable of modelling such changes. Alternatively, [[conjoint analysis]] (a ranking of users' preferences which can then be statistically analysed) may be used.<ref>Png, Ivan (1999). pp.79-80.</ref>
 
Though PEDs for most demand schedules vary depending on price, they can be modeled assuming constant elasticity.<ref>{{cite web|url=http://wpscms.pearsoncmg.com/aw_perloff_microecon_3/9/2365/605606.cw/index.html|title=Constant Elasticity Demand and Supply Curves (Q=A*P^c)|accessdate=26 April 2010}}</ref>  Using this method, the PEDs for various goods—intended to act as examples of the theory described above—are as follows. For suggestions on why these goods and services may have the PED shown, see the above section on determinants of price elasticity.
 
{{col-begin}}
{{col-break}}
* Cigarettes (US)<ref name="ReferenceB">Perloff, J. (2008). p.97.</ref>
** −0.3 to −0.6 (General)
** −0.6 to −0.7 (Youth)
* Alcoholic beverages (US)<ref>Chaloupka, Frank J.; Grossman, Michael; Saffer, Henry (2002); Hogarty and Elzinga (1972) cited by Douglas Greer in Duetsch (1993).</ref>
**−0.3 or −0.7 to −0.9 as of 1972 (Beer)
**−1.0 (Wine)
**−1.5 (Spirits)
* Airline travel (US)<ref name=PindyckRubinfeldPage381>Pindyck; Rubinfeld (2001). p.381.; Steven Morrison in Duetsch (1993), p. 231.</ref>
**−0.3 (First Class)
**−0.9 (Discount)
**−1.5 (for Pleasure Travelers)
* Livestock
** −0.5 to −0.6  ([[Broiler chicken|Broiler Chickens]])<ref>Richard T. Rogers in Duetsch (1993), p.6.</ref>
* Oil (World)
**−0.4
* Car fuel<ref>{{cite web|url=http://dx.doi.org/10.1016/j.eneco.2011.09.003|title=Demand for gasoline is more price-inelastic than commonly thought|publisher=Energy Economics|accessdate=11 December 2011}}</ref>
**−0.09 (Short run)
**−0.31 (Long run)
* Medicine (US)
**−0.31 (Medical insurance)<ref name="Samuelson 2001">Samuelson; Nordhaus (2001).</ref>
**−.03 to −.06 ([[Pediatrics|Pediatric]] Visits)<ref>Goldman and Grossman (1978) cited in Feldstein (1999), p.99</ref>
{{col-break}}
* Rice<ref name="Perloff, Microeconomics Theory 2008">Perloff, J. (2008).</ref>
**−0.47 (Austria)
**−0.8{{0}} (Bangladesh)
**−0.8{{0}} (China)
**−0.25 (Japan)
**−0.55 (US)
* Cinema visits (US)
**−0.87 (General)<ref name="Samuelson 2001"/>
* Live Performing Arts (Theater, etc.)
** −0.4 to −0.9<ref>Heilbrun and Gray (1993, p.94) cited in Vogel (2001)</ref>
* Transport
** −0.20 (Bus travel US)<ref name="Samuelson 2001"/>
** −2.8{{0}} (Ford compact automobile)<ref>Goodwin; Nelson; Ackerman; Weissskopf (2009). p.124.</ref>
* Soft drinks
**−0.8 to −1.0 (general)<ref>Brownell, Kelly D.; Farley, Thomas; Willett, Walter C. et al. (2009).</ref>
**−3.8 ([[Coca-Cola]])<ref name="ayers120">Ayers; Collinge (2003). p.120.</ref>
**−4.4 ([[Mountain Dew]])<ref name="ayers120"/>
* Steel
**−0.2 to −0.3<ref>Barnett and Crandall in Duetsch (1993), p.147</ref>
*Eggs
**−0.1 (US: Household only),<ref>Krugman and Wells (2009) p.147.</ref> −0.35 (Canada),<ref>{{cite web|url=http://www.agr.gc.ca/poultry/prinde3_eng.htm#sec312|title=Profile of The Canadian Egg Industry|publisher=Agriculture and Agri-Food Canada|accessdate=9 September 2010}}{{dead link|date=January 2014}}</ref> −0.55 (South Africa)<ref>{{cite journal |title=Demand Analysis of Eggs in South Africa |first=R. C. G. |last=Cleasby |first2=G. F. |last2=Ortmann |journal=Agrekon |volume=30 |issue=1 |year=1991 |pages=34–36 |doi=10.1080/03031853.1991.9524200 }}</ref>
 
{{col-end}}
 
==See also==
*[[Arc elasticity]]
*[[Cross elasticity of demand]]
*[[Income elasticity of demand]]
*[[Price elasticity of supply]]
*[[Supply and demand]]
*[[Yield elasticity of bond value]]
*[[Elastic]]
 
==Notes==
{{Reflist|20em}}
 
==References==
{{refbegin}}
* {{cite book|last=Arnold|first=Roger A.|title=Economics|url=http://books.google.com/books?id=EGeEMRfsrRsC|accessdate=28 February 2010|date=17 December 2008|publisher=Cengage Learning|isbn=978-0-324-59542-0}}
* {{Cite book|last1=Ayers|last2=Collinge|title=Microeconomics|publisher=Pearson|year=2003|isbn=0-536-53313-X}}
* {{Cite journal|doi=10.1056/NEJMhpr0905723|url=http://content.nejm.org/cgi/content/full/NEJMhpr0905723|title=The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages|first=Kelly D.|last=Brownell|first2=Thomas|last2=Farley|first3=Walter C.|last3=Willett|first4=Barry M.|last4=Popkin|first5=Frank J.|last5=Chaloupka|first6=Joseph W.|last6=Thompson|first7=David S.|last7=Ludwig|journal=New England Journal of Medicine|volume=361|issue=16|pages=1599–1605|date=15 October 2009|pmid=19759377|pmc=3140416}}
* {{Cite book|last1=Case|first1=Karl|last2=Fair|first2=Ray|year=1999|title=Principles of Economics|edition=5th|publisher=Prentice-Hall|isbn=0-13-961905-4}}
* {{Cite journal|title=The effects of price on alcohol consumption and alcohol-related problems|journal=Alcohol Research and Health|year=2002|first=Frank J.|last=Chaloupka|first2=Michael|last2=Grossman|first3=Henry|last3=Saffer}}
* {{cite book|last=Duetsch|first=Larry L.|title=Industry Studies|publisher=Prentice Hall|location=Englewood Cliffs, NJ|year=1993|isbn=0-585-01979-7}}
* {{cite book|last=Feldstein|first=Paul J.|title=Health Care Economics|edition=5th|publisher=Delmar Publishers|location=Albany, NY|year=1999|isbn=0-7668-0699-5}}
* {{cite book|last=Ferguson|first=Charles E.|title=Microeconomic Theory|publisher=Richard D. Irwin|location=Homewood, Illinois|year=1972|edition=3rd|isbn=0-256-02157-0}}
* {{cite book|last=Frank|first=Robert|year=2008|title=Microeconomics and Behavior|edition=7th|publisher=McGraw-Hill|isbn=978-0-07-126349-8}}
* {{cite book|last=Gillespie|first=Andrew|title=Foundations of Economics|url=http://books.google.com/books?id=9NoT4gnYvPMC|accessdate=28 February 2010|date=1 March 2007|publisher=Oxford University Press|isbn=978-0-19-929637-8}}
* {{Cite book|last1=Goodwin|last2=Nelson|last3=Ackerman|last4=Weisskopf|year=2009|title=Microeconomics in Context|edition=2nd|publisher=Sharpe|isbn=0-618-34599-X}}
* {{cite book|last1=Gwartney|first1=James D.|last2=Stroup|first2=Richard L.|last3=Sobel|first3=Russell S.|coauthors=David MacPherson|title=Economics: Private and Public Choice|url=http://books.google.com/books?id=yIbH4R77OtMC|accessdate=28 February 2010|date=14 January 2008|publisher=Cengage Learning|isbn=978-0-324-58018-1}}
* {{Cite book|last1=Krugman|last2=Wells|title=Microeconomics|edition=2nd|publisher=Worth|year=2009 |isbn=978-0-7167-7159-3}}
* {{Cite book|last=Landers|title=Estimates of the Price Elasticity of Demand for Casino Gaming and the Potential Effects of Casino Tax Hikes|date=February 2008}}
* {{cite book|last=Marshall|first=Alfred|title=Principles of Economics|year=1920|publisher=Library of Economics and Liberty|accessdate=5 March 2010|url=http://www.econlib.org/library/Marshall/marP12.html|isbn=0-256-01547-3}}
* {{Cite book|last1=Mas-Colell|first1=Andreu|author1-link=Andreu Mas-Colell|first2=Michael D.|last2=Winston|first3=Jerry R.|last3=Green|year=1995|title=Microeconomic Theory|publisher=Oxford University Press|location=New York|isbn=1-4288-7151-9}}
* {{cite book|last=McConnell|first=Campbell R.|coauthors=Brue, Stanley L.|title=Economics: Principles, Problems, and Policies|publisher=McGraw-Hill|location=New York|year=1990|edition=11th|isbn=0-07-044967-8}}
* {{Cite book|last=Negbennebor|year=2001|title=Microeconomics|chapter=The Freedom to Choose|isbn=1-56226-485-0}}
* {{Cite book|last1=Parkin | first1 = Michael | last2 = Powell | first2 = Melanie | last3 = Matthews | first3 = Kent | title = Economics | year = 2002 | publisher = Addison-Wesley | location = Harlow  | isbn = 0-273-65813-1}}
* {{Cite book|last=Perloff|first=J.|title=Microeconomic Theory & Applications with Calculus|publisher=Pearson|year=2008|isbn=978-0-321-27794-7}}
* {{Cite book|last1=Pindyck|last2=Rubinfeld|title=Microeconomics|edition=5th|publisher=Prentice-Hall|year=2001|isbn=1-4058-9340-0}}
* {{Cite book|last=Png|first=Ivan|year=1999|title=Managerial Economics|publisher=Blackwell|url=http://books.google.co.uk/books?id=SecBA0uR71MC|accessdate=28 February 2010 | isbn=978-0-631-22516-4}}
* {{cite book|last=Ruffin|first=Roy J.|coauthors=Gregory, Paul R.|title=Principles of Economics|publisher=Scott, Foresman|location=Glenview, Illinois|year=1988|edition=3rd|isbn=0-673-18871-X}}
* {{Cite book|last1=Samuelson|last2=Nordhaus|year=2001|title=Microeconomics|edition=17th|publisher=McGraw-Hill|isbn=0-07-057953-9}}
* {{cite book|last1=Schumpeter|first1=Joseph Alois|last2=Schumpeter|first2=Elizabeth Boody|title=History of economic analysis|url=http://books.google.com/books?id=pTylUAXE-toC|accessdate=5 March 2010|edition=12th|year=1994|publisher=Routledge|isbn=978-0-415-10888-1}}
* {{cite book|last=Sloman|first=John|title=Economics|url=http://books.google.com/books?id=EotlIrKjdBUC|accessdate=5 March 2010|year=2006|publisher=Financial Times Prentice Hall|isbn=978-0-273-70512-3}}
* {{cite book|last=Taylor|first=John B.|title=Economics|url=http://books.google.com/books?id=mZGDHmPHAb4C|accessdate=5 March 2010|date=1 February 2006|publisher=Cengage Learning|isbn=978-0-618-64085-0}}
* {{cite book|last1=Vogel|first1=Harold|title=Entertainment Industry Economics|edition=5th|year=2001|publisher=Cambridge University Press|isbn=0-521-79264-9}}
* {{cite book|last1=Wall|first1=Stuart|last2=Griffiths|first2=Alan|title=Economics for Business and Management|url=http://books.google.com/books?id=TrRtUr_Wn2IC|accessdate=6 March 2010|year=2008|publisher=Financial Times Prentice Hall|isbn=978-0-273-71367-8}}
* {{cite book|last=Wessels|first=Walter J.|title=Economics|url=http://books.google.com/books?id=0hggJhQQQboC|accessdate=28 February 2010|date=1 September 2000|publisher=Barron's Educational Series|isbn=978-0-7641-1274-4}}
{{refend}}
 
==External links==
*[http://www.economistsdoitwithmodels.com/2010/03/10/videos-more-than-you-ever-wanted-to-know-about-elasticity/ A Lesson on Elasticity in Four Parts, Youtube, Jodi Beggs]
*[http://whitebirchsoftware.com/blogs/price-elasticity-models-and-optimization Price Elasticity Models and Optimization]
*[http://www.mackinac.org/article.aspx?ID=1247 Approx. PED of Various Products (U.S.)]
*[https://statistics.defra.gov.uk/esg/publications/nfs/2000/Section6.pdf Approx. PED of Various Home-Consumed Foods (U.K.)]{{dead link|date=October 2010}}
 
{{good article}}
 
{{DEFAULTSORT:Price Elasticity Of Demand}}
[[Category:Elasticity (economics)]]
[[Category:Consumer theory]]
[[Category:Demand]]
 
{{Link GA|es}}

Revision as of 14:39, 5 January 2014

Template:Distinguish

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall.

Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.

Definition

It is a measure of responsiveness of the quantity of a raw good or service demanded to changes in its price.[1] The formula for the coefficient of price elasticity of demand for a good is:[2][3][4]

The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the "law of demand".[3] For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are Veblen and Giffen goods.[5] Because the PED is negative for the vast majority of goods and services, however, economists often refer to price elasticity of demand as a positive value (i.e., in absolute value terms).[4]

This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good.[1] The latter type of elasticity measure is called a cross-price elasticity of demand.[6][7]

As the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above decreases for a combination of two reasons. First, the PED for a good is not necessarily constant; as explained below, PED can vary at different points along the demand curve, due to its percentage nature.[8][9] Elasticity is not the same thing as the slope of the demand curve, which is dependent on the units used for both price and quantity.[10][11] Second, percentage changes are not symmetric; instead, the percentage change between any two values depends on which one is chosen as the starting value and which as the ending value. For example, if quantity demanded increases from 10 units to 15 units, the percentage change is 50%, i.e., (15 − 10) ÷ 10 (converted to a percentage). But if quantity demanded decreases from 15 units to 10 units, the percentage change is −33.3%, i.e., (10 − 15) ÷ 15.[12][13]

Two alternative elasticity measures avoid or minimise these shortcomings of the basic elasticity formula: point-price elasticity and arc elasticity.

Point-price elasticity

One way to avoid the accuracy problem described above is to minimise the difference between the starting and ending prices and quantities. This is the approach taken in the definition of point-price elasticity, which uses differential calculus to calculate the elasticity for an infinitesimal change in price and quantity at any given point on the demand curve: [14]

In other words, it is equal to the absolute value of the first derivative of quantity with respect to price (dQd/dP) multiplied by the point's price (P) divided by its quantity (Qd).[15]

In terms of partial-differential calculus, point-price elasticity of demand can be defined as follows:[16] let be the demand of goods as a function of parameters price and wealth, and let be the demand for good . The elasticity of demand for good with respect to price is

However, the point-price elasticity can be computed only if the formula for the demand function, , is known so its derivative with respect to price, , can be determined.

Arc elasticity

A second solution to the asymmetry problem of having a PED dependent on which of the two given points on a demand curve is chosen as the "original" point and which as the "new" one is to compute the percentage change in P and Q relative to the average of the two prices and the average of the two quantities, rather than just the change relative to one point or the other. Loosely speaking, this gives an "average" elasticity for the section of the actual demand curve—i.e., the arc of the curve—between the two points. As a result, this measure is known as the arc elasticity, in this case with respect to the price of the good. The arc elasticity is defined mathematically as:[13][17][18]

This method for computing the price elasticity is also known as the "midpoints formula", because the average price and average quantity are the coordinates of the midpoint of the straight line between the two given points.[12][18] This formula is an application of the midpoint method. However, because this formula implicitly assumes the section of the demand curve between those points is linear, the greater the curvature of the actual demand curve is over that range, the worse this approximation of its elasticity will be.[17][19]

History

The illustration that accompanied Marshall's original definition of PED, the ratio of PT to Pt

Together with the concept of an economic "elasticity" coefficient, Alfred Marshall is credited with defining PED ("elasticity of demand") in his book Principles of Economics, published in 1890.[20] He described it thus: "And we may say generally:— the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price".[21] He reasons this since "the only universal law as to a person's desire for a commodity is that it diminishes... but this diminution may be slow or rapid. If it is slow... a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case... the elasticity of his wants, we may say, is great. In the latter case... the elasticity of his demand is small."[22] Mathematically, the Marshallian PED was based on a point-price definition, using differential calculus to calculate elasticities.[23]

Determinants

The overriding factor in determining PED is the willingness and ability of consumers after a price change to postpone immediate consumption decisions concerning the good and to search for substitutes ("wait and look").[24] A number of factors can thus affect the elasticity of demand for a good:[25]

  • Availability of substitute goods: the more and closer the substitutes available, the higher the elasticity is likely to be, as people can easily switch from one good to another if an even minor price change is made;[25][26][27] There is a strong substitution effect.[28] If no close substitutes are available, the substitution effect will be small and the demand inelastic.[28]
  • Breadth of definition of a good: the broader the definition of a good (or service), the lower the elasticity. For example, Company X's fish and chips would tend to have a relatively high elasticity of demand if a significant number of substitutes are available, whereas food in general would have an extremely low elasticity of demand because no substitutes exist.[29]
  • Percentage of income: the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost;[25][26] The income effect is substantial.[30] When the goods represent only a negligible portion of the budget the income effect will be insignificant and demand inelastic,[30]
  • Necessity: the more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for those that need it.[10][26]
  • Duration: for most goods, the longer a price change holds, the higher the elasticity is likely to be, as more and more consumers find they have the time and inclination to search for substitutes.[25][27] When fuel prices increase suddenly, for instance, consumers may still fill up their empty tanks in the short run, but when prices remain high over several years, more consumers will reduce their demand for fuel by switching to carpooling or public transportation, investing in vehicles with greater fuel economy or taking other measures.[26] This does not hold for consumer durables such as the cars themselves, however; eventually, it may become necessary for consumers to replace their present cars, so one would expect demand to be less elastic.[26]
  • Brand loyalty: an attachment to a certain brand—either out of tradition or because of proprietary barriers—can override sensitivity to price changes, resulting in more inelastic demand.[29][31]
  • Who pays: where the purchaser does not directly pay for the good they consume, such as with corporate expense accounts, demand is likely to be more inelastic.[31]

Interpreting values of price elasticity coefficients

Perfectly inelastic demand[10]
Perfectly elastic demand[10]

Elasticities of demand are interpreted as follows:[10]

Value Descriptive Terms
Perfectly inelastic demand
Inelastic or relatively inelastic demand
Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand
Elastic or relatively elastic demand
Perfectly elastic demand

A decrease in the price of a good normally results in an increase in the quantity demanded by consumers because of the law of demand, and conversely, quantity demanded decreases when price rises. As summarized in the table above, the PED for a good or service is referred to by different descriptive terms depending on whether the elasticity coefficient is greater than, equal to, or less than −1. That is, the demand for a good is called:

  • relatively inelastic when the percentage change in quantity demanded is less than the percentage change in price (so that Ed > - 1);
  • unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand when the percentage change in quantity demanded is equal to the percentage change in price (so that Ed = - 1); and
  • relatively elastic when the percentage change in quantity demanded is greater than the percentage change in price (so that Ed < - 1).[10]

As the two accompanying diagrams show, perfectly elastic demand is represented graphically as a horizontal line, and perfectly inelastic demand as a vertical line. These are the only cases in which the PED and the slope of the demand curve (∆P/∆Q) are both constant, as well as the only cases in which the PED is determined solely by the slope of the demand curve (or more precisely, by the inverse of that slope).[10]

Effect on total revenue

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A set of graphs shows the relationship between demand and total revenue (TR) for a linear demand curve. As price decreases in the elastic range, TR increases, but in the inelastic range, TR decreases. TR is maximised at the quantity where PED = 1.

A firm considering a price change must know what effect the change in price will have on total revenue. Revenue is simply the product of unit price times quantity:

Generally any change in price will have two effects:[32]

  • the price effect : For inelastic goods, an increase in unit price will tend to increase revenue, while a decrease in price will tend to decrease revenue. (The effect is reversed for elastic goods.)
  • the quantity effect : an increase in unit price will tend to lead to fewer units sold, while a decrease in unit price will tend to lead to more units sold.

For inelastic goods, because of the inverse nature of the relationship between price and quantity demanded (i.e., the law of demand), the two effects affect total revenue in opposite directions. But in determining whether to increase or decrease prices, a firm needs to know what the net effect will be. Elasticity provides the answer: The percentage change in total revenue is approximately equal to the percentage change in quantity demanded plus the percentage change in price. (One change will be positive, the other negative.)[33] The percentage change in quantity is related to the percentage change in price by elasticity: hence the percentage change in revenue can be calculated by knowing the elasticity and the percentage change in price alone.

As a result, the relationship between PED and total revenue can be described for any good:[34][35]

  • When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good; raising prices will always cause total revenue to increase. Goods necessary to survival can be classified here; a rational person will be willing to pay anything for a good if the alternative is death. For example, a person in the desert weak and dying of thirst would easily give all the money in his wallet, no matter how much, for a bottle of water if he would otherwise die. His demand is not contingent on the price.
  • When the price elasticity of demand for a good is relatively inelastic (-1 < Ed < 0), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue rises, and vice versa.
  • When the price elasticity of demand for a good is unit (or unitary) elastic (Ed = 1), the percentage change in quantity is equal to that in price, so a change in price will not affect total revenue.
  • When the price elasticity of demand for a good is relatively elastic ( -∞ < Ed < -1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue falls, and vice versa.
  • When the price elasticity of demand for a good is perfectly elastic (Ed is − ), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue falls to zero. This situation is typical for goods that have their value defined by law (such as fiat currency); if a 5 dollar bill were sold for anything more than 5 dollars, nobody would buy it, so demand is zero.

Hence, as the accompanying diagram shows, total revenue is maximized at the combination of price and quantity demanded where the elasticity of demand is unitary.[35]

It is important to realize that price-elasticity of demand is not necessarily constant over all price ranges. The linear demand curve in the accompanying diagram illustrates that changes in price also change the elasticity: the price elasticity is different at every point on the curve.

Effect on tax incidence

When demand is more inelastic than supply, consumers will bear a greater proportion of the tax burden than producers will.

Mining Engineer (Excluding Oil ) Truman from Alma, loves to spend time knotting, largest property developers in singapore developers in singapore and stamp collecting. Recently had a family visit to Urnes Stave Church. PEDs, in combination with price elasticity of supply (PES), can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is perfectly inelastic, by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant. Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety. In the opposite case, when demand is perfectly elastic, by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero. As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.[36]

In practice, demand is likely to be only relatively elastic or relatively inelastic, that is, somewhere between the extreme cases of perfect elasticity or inelasticity. More generally, then, the higher the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more inelastic the demand compared to PES, the heavier the burden on consumers. The general principle is that the party (i.e., consumers or producers) that has fewer opportunities to avoid the tax by switching to alternatives will bear the greater proportion of the tax burden.[36] In the end the whole tax burden is carried by individual households since they are the ultimate owners of the means of production that the firm utilises (see Circular flow of income).

Optimal pricing

Among the most common applications of price elasticity is to determine prices that maximize revenue or profit.

Constant elasticity and optimal pricing

If one point elasticity is used to model demand changes over a finite range of prices, elasticity is implicitly assumed constant with respect to price over the finite price range. The equation defining price elasticity for one product can be rewritten (omitting secondary variables) as a linear equation.

where

is the elasticity, and is a constant.

Similarly, the equations for cross elasticity for n products can be written as a set of n simultaneous linear equations.

where

and , and are constants; and appearance of a letter index as both an upper index and a lower index in the same term implies summation over that index.

This form of the equations shows that point elasticities assumed constant over a price range cannot determine what prices generate maximum values of ; similarly they cannot predict prices that generate maximum or maximum revenue.

Constant elasticities can predict optimal pricing only by computing point elasticities at several points, to determine the price at which point elasticity equals -1 (or, for multiple products, the set of prices at which the point elasticity matrix is the negative identity matrix).

Non-constant elasticity and optimal pricing

If the definition of price elasticity is extended to yield a quadratic relationship between demand units () and price, then it is possible to compute prices that maximize , , and revenue. The fundamental equation for one product becomes

and the corresponding equation for several products becomes

Excel models are available that compute constant elasticity, and use non-constant elasticity to estimate prices that optimize revenue or profit for one product[37] or several products.[38]

Limitations of revenue-maximizing and profit-maximizing pricing strategies

In most situations, revenue-maximizing prices are not profit-maximizing prices. For example, if variable costs per unit are nonzero (which they almost always are), then a more complex computation of a similar kind yields prices that generate optimal profits.

In some situations, profit-maximizing prices are not an optimal strategy. For example, where scale economies are large (as they often are), capturing market share may be the key to long-term dominance of a market, so maximizing revenue or profit may not be the optimal strategy.

Selected price elasticities

Various research methods are used to calculate price elasticities in real life, including analysis of historic sales data, both public and private, and use of present-day surveys of customers' preferences to build up test markets capable of modelling such changes. Alternatively, conjoint analysis (a ranking of users' preferences which can then be statistically analysed) may be used.[39]

Though PEDs for most demand schedules vary depending on price, they can be modeled assuming constant elasticity.[40] Using this method, the PEDs for various goods—intended to act as examples of the theory described above—are as follows. For suggestions on why these goods and services may have the PED shown, see the above section on determinants of price elasticity.

Template:Col-begin Template:Col-break

  • Cigarettes (US)[41]
    • −0.3 to −0.6 (General)
    • −0.6 to −0.7 (Youth)
  • Alcoholic beverages (US)[42]
    • −0.3 or −0.7 to −0.9 as of 1972 (Beer)
    • −1.0 (Wine)
    • −1.5 (Spirits)
  • Airline travel (US)[43]
    • −0.3 (First Class)
    • −0.9 (Discount)
    • −1.5 (for Pleasure Travelers)
  • Livestock
  • Oil (World)
    • −0.4
  • Car fuel[45]
    • −0.09 (Short run)
    • −0.31 (Long run)
  • Medicine (US)

Template:Col-break

  • Rice[48]
    • −0.47 (Austria)
    • −0.8Template:0 (Bangladesh)
    • −0.8Template:0 (China)
    • −0.25 (Japan)
    • −0.55 (US)
  • Cinema visits (US)
    • −0.87 (General)[46]
  • Live Performing Arts (Theater, etc.)
    • −0.4 to −0.9[49]
  • Transport
  • Soft drinks
  • Steel
    • −0.2 to −0.3[53]
  • Eggs
    • −0.1 (US: Household only),[54] −0.35 (Canada),[55] −0.55 (South Africa)[56]

Template:Col-end

See also

Notes

43 year old Petroleum Engineer Harry from Deep River, usually spends time with hobbies and interests like renting movies, property developers in singapore new condominium and vehicle racing. Constantly enjoys going to destinations like Camino Real de Tierra Adentro.

References

Template:Refbegin

  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • One of the biggest reasons investing in a Singapore new launch is an effective things is as a result of it is doable to be lent massive quantities of money at very low interest rates that you should utilize to purchase it. Then, if property values continue to go up, then you'll get a really high return on funding (ROI). Simply make sure you purchase one of the higher properties, reminiscent of the ones at Fernvale the Riverbank or any Singapore landed property Get Earnings by means of Renting

    In its statement, the singapore property listing - website link, government claimed that the majority citizens buying their first residence won't be hurt by the new measures. Some concessions can even be prolonged to chose teams of consumers, similar to married couples with a minimum of one Singaporean partner who are purchasing their second property so long as they intend to promote their first residential property. Lower the LTV limit on housing loans granted by monetary establishments regulated by MAS from 70% to 60% for property purchasers who are individuals with a number of outstanding housing loans on the time of the brand new housing purchase. Singapore Property Measures - 30 August 2010 The most popular seek for the number of bedrooms in Singapore is 4, followed by 2 and three. Lush Acres EC @ Sengkang

    Discover out more about real estate funding in the area, together with info on international funding incentives and property possession. Many Singaporeans have been investing in property across the causeway in recent years, attracted by comparatively low prices. However, those who need to exit their investments quickly are likely to face significant challenges when trying to sell their property – and could finally be stuck with a property they can't sell. Career improvement programmes, in-house valuation, auctions and administrative help, venture advertising and marketing, skilled talks and traisning are continuously planned for the sales associates to help them obtain better outcomes for his or her shoppers while at Knight Frank Singapore. No change Present Rules

    Extending the tax exemption would help. The exemption, which may be as a lot as $2 million per family, covers individuals who negotiate a principal reduction on their existing mortgage, sell their house short (i.e., for lower than the excellent loans), or take part in a foreclosure course of. An extension of theexemption would seem like a common-sense means to assist stabilize the housing market, but the political turmoil around the fiscal-cliff negotiations means widespread sense could not win out. Home Minority Chief Nancy Pelosi (D-Calif.) believes that the mortgage relief provision will be on the table during the grand-cut price talks, in response to communications director Nadeam Elshami. Buying or promoting of blue mild bulbs is unlawful.

    A vendor's stamp duty has been launched on industrial property for the primary time, at rates ranging from 5 per cent to 15 per cent. The Authorities might be trying to reassure the market that they aren't in opposition to foreigners and PRs investing in Singapore's property market. They imposed these measures because of extenuating components available in the market." The sale of new dual-key EC models will even be restricted to multi-generational households only. The models have two separate entrances, permitting grandparents, for example, to dwell separately. The vendor's stamp obligation takes effect right this moment and applies to industrial property and plots which might be offered inside three years of the date of buy. JLL named Best Performing Property Brand for second year running

    The data offered is for normal info purposes only and isn't supposed to be personalised investment or monetary advice. Motley Fool Singapore contributor Stanley Lim would not personal shares in any corporations talked about. Singapore private home costs increased by 1.eight% within the fourth quarter of 2012, up from 0.6% within the earlier quarter. Resale prices of government-built HDB residences which are usually bought by Singaporeans, elevated by 2.5%, quarter on quarter, the quickest acquire in five quarters. And industrial property, prices are actually double the levels of three years ago. No withholding tax in the event you sell your property. All your local information regarding vital HDB policies, condominium launches, land growth, commercial property and more

    There are various methods to go about discovering the precise property. Some local newspapers (together with the Straits Instances ) have categorised property sections and many local property brokers have websites. Now there are some specifics to consider when buying a 'new launch' rental. Intended use of the unit Every sale begins with 10 p.c low cost for finish of season sale; changes to 20 % discount storewide; follows by additional reduction of fiftyand ends with last discount of 70 % or extra. Typically there is even a warehouse sale or transferring out sale with huge mark-down of costs for stock clearance. Deborah Regulation from Expat Realtor shares her property market update, plus prime rental residences and houses at the moment available to lease Esparina EC @ Sengkang
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • One of the biggest reasons investing in a Singapore new launch is an effective things is as a result of it is doable to be lent massive quantities of money at very low interest rates that you should utilize to purchase it. Then, if property values continue to go up, then you'll get a really high return on funding (ROI). Simply make sure you purchase one of the higher properties, reminiscent of the ones at Fernvale the Riverbank or any Singapore landed property Get Earnings by means of Renting

    In its statement, the singapore property listing - website link, government claimed that the majority citizens buying their first residence won't be hurt by the new measures. Some concessions can even be prolonged to chose teams of consumers, similar to married couples with a minimum of one Singaporean partner who are purchasing their second property so long as they intend to promote their first residential property. Lower the LTV limit on housing loans granted by monetary establishments regulated by MAS from 70% to 60% for property purchasers who are individuals with a number of outstanding housing loans on the time of the brand new housing purchase. Singapore Property Measures - 30 August 2010 The most popular seek for the number of bedrooms in Singapore is 4, followed by 2 and three. Lush Acres EC @ Sengkang

    Discover out more about real estate funding in the area, together with info on international funding incentives and property possession. Many Singaporeans have been investing in property across the causeway in recent years, attracted by comparatively low prices. However, those who need to exit their investments quickly are likely to face significant challenges when trying to sell their property – and could finally be stuck with a property they can't sell. Career improvement programmes, in-house valuation, auctions and administrative help, venture advertising and marketing, skilled talks and traisning are continuously planned for the sales associates to help them obtain better outcomes for his or her shoppers while at Knight Frank Singapore. No change Present Rules

    Extending the tax exemption would help. The exemption, which may be as a lot as $2 million per family, covers individuals who negotiate a principal reduction on their existing mortgage, sell their house short (i.e., for lower than the excellent loans), or take part in a foreclosure course of. An extension of theexemption would seem like a common-sense means to assist stabilize the housing market, but the political turmoil around the fiscal-cliff negotiations means widespread sense could not win out. Home Minority Chief Nancy Pelosi (D-Calif.) believes that the mortgage relief provision will be on the table during the grand-cut price talks, in response to communications director Nadeam Elshami. Buying or promoting of blue mild bulbs is unlawful.

    A vendor's stamp duty has been launched on industrial property for the primary time, at rates ranging from 5 per cent to 15 per cent. The Authorities might be trying to reassure the market that they aren't in opposition to foreigners and PRs investing in Singapore's property market. They imposed these measures because of extenuating components available in the market." The sale of new dual-key EC models will even be restricted to multi-generational households only. The models have two separate entrances, permitting grandparents, for example, to dwell separately. The vendor's stamp obligation takes effect right this moment and applies to industrial property and plots which might be offered inside three years of the date of buy. JLL named Best Performing Property Brand for second year running

    The data offered is for normal info purposes only and isn't supposed to be personalised investment or monetary advice. Motley Fool Singapore contributor Stanley Lim would not personal shares in any corporations talked about. Singapore private home costs increased by 1.eight% within the fourth quarter of 2012, up from 0.6% within the earlier quarter. Resale prices of government-built HDB residences which are usually bought by Singaporeans, elevated by 2.5%, quarter on quarter, the quickest acquire in five quarters. And industrial property, prices are actually double the levels of three years ago. No withholding tax in the event you sell your property. All your local information regarding vital HDB policies, condominium launches, land growth, commercial property and more

    There are various methods to go about discovering the precise property. Some local newspapers (together with the Straits Instances ) have categorised property sections and many local property brokers have websites. Now there are some specifics to consider when buying a 'new launch' rental. Intended use of the unit Every sale begins with 10 p.c low cost for finish of season sale; changes to 20 % discount storewide; follows by additional reduction of fiftyand ends with last discount of 70 % or extra. Typically there is even a warehouse sale or transferring out sale with huge mark-down of costs for stock clearance. Deborah Regulation from Expat Realtor shares her property market update, plus prime rental residences and houses at the moment available to lease Esparina EC @ Sengkang
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534
  • 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.

    My blog: http://www.primaboinca.com/view_profile.php?userid=5889534

Template:Refend

External links

Template:Good article

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  56. One of the biggest reasons investing in a Singapore new launch is an effective things is as a result of it is doable to be lent massive quantities of money at very low interest rates that you should utilize to purchase it. Then, if property values continue to go up, then you'll get a really high return on funding (ROI). Simply make sure you purchase one of the higher properties, reminiscent of the ones at Fernvale the Riverbank or any Singapore landed property Get Earnings by means of Renting

    In its statement, the singapore property listing - website link, government claimed that the majority citizens buying their first residence won't be hurt by the new measures. Some concessions can even be prolonged to chose teams of consumers, similar to married couples with a minimum of one Singaporean partner who are purchasing their second property so long as they intend to promote their first residential property. Lower the LTV limit on housing loans granted by monetary establishments regulated by MAS from 70% to 60% for property purchasers who are individuals with a number of outstanding housing loans on the time of the brand new housing purchase. Singapore Property Measures - 30 August 2010 The most popular seek for the number of bedrooms in Singapore is 4, followed by 2 and three. Lush Acres EC @ Sengkang

    Discover out more about real estate funding in the area, together with info on international funding incentives and property possession. Many Singaporeans have been investing in property across the causeway in recent years, attracted by comparatively low prices. However, those who need to exit their investments quickly are likely to face significant challenges when trying to sell their property – and could finally be stuck with a property they can't sell. Career improvement programmes, in-house valuation, auctions and administrative help, venture advertising and marketing, skilled talks and traisning are continuously planned for the sales associates to help them obtain better outcomes for his or her shoppers while at Knight Frank Singapore. No change Present Rules

    Extending the tax exemption would help. The exemption, which may be as a lot as $2 million per family, covers individuals who negotiate a principal reduction on their existing mortgage, sell their house short (i.e., for lower than the excellent loans), or take part in a foreclosure course of. An extension of theexemption would seem like a common-sense means to assist stabilize the housing market, but the political turmoil around the fiscal-cliff negotiations means widespread sense could not win out. Home Minority Chief Nancy Pelosi (D-Calif.) believes that the mortgage relief provision will be on the table during the grand-cut price talks, in response to communications director Nadeam Elshami. Buying or promoting of blue mild bulbs is unlawful.

    A vendor's stamp duty has been launched on industrial property for the primary time, at rates ranging from 5 per cent to 15 per cent. The Authorities might be trying to reassure the market that they aren't in opposition to foreigners and PRs investing in Singapore's property market. They imposed these measures because of extenuating components available in the market." The sale of new dual-key EC models will even be restricted to multi-generational households only. The models have two separate entrances, permitting grandparents, for example, to dwell separately. The vendor's stamp obligation takes effect right this moment and applies to industrial property and plots which might be offered inside three years of the date of buy. JLL named Best Performing Property Brand for second year running

    The data offered is for normal info purposes only and isn't supposed to be personalised investment or monetary advice. Motley Fool Singapore contributor Stanley Lim would not personal shares in any corporations talked about. Singapore private home costs increased by 1.eight% within the fourth quarter of 2012, up from 0.6% within the earlier quarter. Resale prices of government-built HDB residences which are usually bought by Singaporeans, elevated by 2.5%, quarter on quarter, the quickest acquire in five quarters. And industrial property, prices are actually double the levels of three years ago. No withholding tax in the event you sell your property. All your local information regarding vital HDB policies, condominium launches, land growth, commercial property and more

    There are various methods to go about discovering the precise property. Some local newspapers (together with the Straits Instances ) have categorised property sections and many local property brokers have websites. Now there are some specifics to consider when buying a 'new launch' rental. Intended use of the unit Every sale begins with 10 p.c low cost for finish of season sale; changes to 20 % discount storewide; follows by additional reduction of fiftyand ends with last discount of 70 % or extra. Typically there is even a warehouse sale or transferring out sale with huge mark-down of costs for stock clearance. Deborah Regulation from Expat Realtor shares her property market update, plus prime rental residences and houses at the moment available to lease Esparina EC @ Sengkang