Price Elasticity of Demand

Hi, this is shoot

them. Choudhary. I am a professor of economics at the University of Sheffield.

In this course,

I'm going to talk about electricity's

in brief. I'm going to talk about three different electricity's.

We're ready to demand

own priceless disturb diamond

Cross price, elasticity of demand,

an income elasticity of demand.

And then I'm going to talk about

price elasticity of supply.

So let's start with one price. Let's just your statement.

When I talk about own price elasticity of demand,

we try to find a relationship between

the price of a product

and it's quantity demanded.

So, in essential, we try to find in what extent

a change in price of a product will affect the quantity demanded to change,

holding all other things constant.

So the elasticity of price indices of demon.

Actually, what we do, we say,

own priceless system demon as in short price in the state of demons.

So the price elasticity of demand is the percentage change in

quantity demanded with respect to percentage change in own price.

Let's give you one example. Let's give example from the limited market.

Suppose

the price of the lemonade

is increased by 9%

and we see in the market that the quantity demanded for lemonade is decreased by 12%.

Then the price elasticity of demand for lemonade is going to be

the

percentage change in quantity demanded

that is minus 12%

divided by the percentage change in price of the lemonade that is 9%.

So it's going to be minus 12%. Divided by 9% is minus four divided battery.

Now, by convention, we do not use the negative sign.

So we are going to say that the price in

the city of lemonade will be four divided by three.

But remember,

many of the time you will not know what is the exact

percentage change in price or in quantity demanded in the market.

However, what you'll know is what the price was.

And what is the level of price now

and what the quantity demanded was.

And what is that changing quantity demanded? Now the level.

So

then I can tell you how we can compute this price illustrative demand,

given all those information.

By definition,

the price illustration of demon is the percentage change in quantity

divided by passing the change in price.

No person to change in quantity is going to be

changing quantity demanded,

divided by the average of the old quantity and new quantity.

Similarly,

percentage change in price is going to be

changing the price.

That is

the difference between new price and old price

divided by the average of the old price and new prices.

Let's put it in equation. Okay. Suppose the old price in a market was P one,

and the corresponding quantity demanded was Cuban.

The new price become P two

and corresponding quantity. Defenders become key to

now. From here, we can derive the change in quantity demanded.

We call it Delta Q. Delta Q Is Q two minus Cuban.

Similarly,

changing price is going to be Delta P.

That is P two minus pure.

What is the average of the old quantity and new

quantity is going to be Cuban plus Q two,

all divided by two right?

That's the average.

Similarly, the average job,

old price and new price is going to be P one plus p two divided by two.

Once we know that we can easily calculate that price illustrate of demon,

the City of Demon

is going to be

this Delta Q divided by Q one plus Q two divided by two right?

Does that percentage change in quantity all divided by Delta P,

divided by P one plus P two divided by two.

Now 22 gets

cancelled

and we get the formula.

The

the Price Institute of Demand is Delta Q divided by Q one plus Q two,

all divided with Delta P divided by P one plus p two.

Now I showed you only the equations.

Let's take some solid example how to calculate those.

Okay, Suppose the price of coffee was £24 per kilogramme

and the demand for coffee was 102 kg.

Now something happened in the market.

The price went up from 24 to 26 kg, £26 per kilogramme

and the demand goes down as 98 kg part coffee

pod coffee

to calculate the price is your demand. What do we have to do now?

We have to find that change in price.

The change in quantity demanded the average

of price an average of quantity demanded,

right?

So what is the change in quantity demanded to begin with?

Well, previously it was 102 kg.

Now it's 98 kg, so the difference is minus four, right?

The average of the old quantity and new quantity is

102 and 98. If you do their average, it's 100

changing price. It was 24

now it's 26. So the changing prices 26 minus 24 that is to

and the average of the price is 24 plus 26 divided by two. That is 25.

So hence the price Illustrator of Demon is going to be minus four,

divided by 100 all divided, with two divided by 25.

And that's going to be minus half.

As I said, we don't conventionally.

We don't use the negative sign because we know that the price

of demon is always negative. So it's going to be just half now. Look at the diagram.

How do we calculate this?

You can see that the demon curve is downward sloping,

and we have the initial price of 24 that is P. One

and the corresponding

Q 102. Now price went up to 26

the corresponding Q two is 98.

To calculate the intensity of demand what you need to do.

You need to find the change in price that is 26 minus 24.

You can see in the diagram that's the Delta P,

and you can also see the change in quantity demanded. That is Delta Q.

That is between the difference between 100 and two and 98.

And then we need to take the average of that new and old price

that is, uh, given with a strike. It should be between 24

26.

Should be 25 right,

And there is another one that is the average of

the quantities 9800 and two that would be 100.

Once we see all this,

we can easily calculate the priceless your demand like we did in the previous part.

No. Three things from whatever we have discussed till now

first, and it's very important.

Own price elasticity of demand is always negative,

and that's why we ignore the negative part and just use

the only the number and why is it always negative?

It comes from the law of demand we know

from law and demand that price and quantity demanded has

a negative relationship so every time price changes if

price goes down quantity Um and it goes up,

the price goes up.

Quantity demanded goes down As a result,

when we try to find the relationship between the changing price

and changing quantity demanded is going to be always negative.

Okay,

so by convention,

we don't use negative sign but we need to

remember The priceless of demand is always negative.

Second point,

the elasticity is unit Liss,

it does not have any unit does not matter how we define the price.

It can be in terms of British pound

us dollars Indian rupee,

Korean one

does not matter.

When we try to get the percentage change in the price, we get only a percentage,

right?

That is the denominator.

The numerator we are looking at quantity demanded

does not matter what you need to use.

It can be kilo later.

Anything

In the end, the percentage change is going to be another person.

Now we have a percent in the numerator

percent in the degenerated person gets

cancelled with each other so we get only a number.

Remember that elasticity does not matter whether we're going to talk about, uh,

own priceless city just like we're doing now.

Later, we're going to talk about cross price elasticity, Uh,

in complicity of demand.

Priceless. You have supply each of the cases.

All the other cities will be unit Lys is just a number.

What are the important part?

The way we measure the electricity here.

We took change from one point of the demand curve to another point,

just like we did in the diagram, right?

It's called the Ark Electricity

because it gives the average electricity between the two points of

the demand curve or the average electricity over the Ark.

There are other ways to calculate electricity, for example, point electricity.

But that will need differentiation that we're not going to cooperate.

Remember, the method to use it gives you a price list of demand,

but it's called the Ark Electricity.