Chapter 4

PRICE ELASTICITY OF DEMAND

• The price elasticity of demand (sometimes simply called price

elasticity) measures how much the quantity demanded of a good
changes when its price changes. The precise definition of price
elasticity is the percentage change in quantity demanded divided by
the percentage change in price.
 Categories of Price Elasticity
• When a 1 percent change in price calls forth more than a 1
percent change in quantity demanded, the good has price-
elastic demand. For example, if a 1 percent increase in price
yields a 5 percent decrease in quantity demanded, the
commodity has a highly price-elastic demand.
• When a 1 percent change in price produces less than a 1
percent change in quantity demanded, the good has price-
inelastic demand. This case occurs, for instance, when a 1
percent increase in price yields only a 0.2 percent decrease in
demand.
• One important special case is unit-elastic demand, which
occurs when the percentage change in quantity is exactly the
same as the percentage change in price. In this case, a 1 percent
increase in price yields a 1 percent decrease in demand.
 Important Note

• The price elasticities of demand for individual goods

are determined by the economic characteristics of
demand. Price elasticities tend to be higher when the
goods are luxuries, when substitutes are available,
and when consumers have more time to adjust their
behavior. By contrast, elasticities are lower for
necessities, for goods with few substitutes, and for
the short run.
Calculating Elasticities: Example
Categories of Elasticities and the Demand
Curve
Two Extreme Scenarios
Elasticity is Not the same as Slope
Calculate Elaticities and Slope at different points

Point Price Quantity demanded

A 12 50
B 10 100
C 8 150
D 6 200
E 4 250
 Ed= Terminology
Numerator/D
enominator
% ∆ Qd > % ∆ P Numerator > Ed >1 Quantity demanded Elastic
Denominator changes demand
proportionately more
than price changes
% ∆ Qd < % ∆ P Numerator < Ed <1 Quantity demanded Inelastic
Denominator changes demand
proportionately less
than price changes
% ∆ Qd = % ∆ P Numerator = Ed =1 Quantity demanded Unit elastic
Denominator changes demand
proportionately to
price changes
% ∆ Qd =0 Numerator =0 Ed =0 Quantity demanded Perfectly
does not change as inelastic
price changes
%∆P=0 Denominator Ed =∞ Quantity demanded Perfectly
=0 extremely responsive elastic