Elasiticity of Demand, PED and Essential Formulas

Elasticity of Demand- is a measure of how consumers react to a ∆ in price

1.Elastic Demand- demand that is very sensitive to a change in price

• Product is NOT a necessity
• There are available substitute
• Examples of Elastic
  -soda
  -Candy

2. Inelastic Demand- Demand that is not sensitive to change in price

• Product is a necessity
•  Few or no substitutes
• People will buy no matter what
• Examples of Inelastic
  -Gas
  - Salt

3. Unitary Demand E=1

 

Price Elasticity of Demand (PED)

1) Quantity

(New quantity – Old quantity)/Old quantity

2) Price

(New price – Old Price)/Old Price

3) PED

Percentage ∆ in Quantity demanded/Percentage ∆ in Price

Total Revenue: the total amount of money a firm receives from selling goods & services P×Q= TR (price × quantity=total revenue)

Fixed Cost: a cost that does not change no matter how much is produced Ex. Rent, mortgage, insurance, salary

Variable Cost:  a cost that rises and falls depending upon how much is produced Ex. Electricity

Marginal Cost: the cost of producing one more unit of a good

 

Formulas

• TC=TFC+TVC
• ATC=AFC+AVC
• AFC=ATC/Q
• AVC=TVC/Q
• ATC=TC/Q
• TFC=AFCxQ
• TVC=AVCxQ