Chapter 4

Price Elasticity of demand: is the percentage change in quantity demanded for a

percentage change in quantity
- High price elasticity indicate that the quantity demanded varies so much as
price change and vice versa
Rule PED = % change in quantity demand / % change in price
Q 2−q 1
∗100
q1
P 2−P 1
∗100
P1

Types of price elasticity

Price elasticity and total revenue
Elasticity Total revenue Price change
Elastic Increase Decrease
Decrease Increase
Unitary elastic Increase No change
Decrease No change
Inelastic Increase Increase
Decrease decrease

Determinant of price elasticity of demand

1- Availability of substitute goods : the more and closer the substitute
available the higher the elasticity is likely to be
2- Breadth of definition of a good :the broader the definition of a good the
low the elasticity
3- Percentage of income : the higher the percentage of the consumer’s
income the he product’s represents the higher the elasticity
4- Necessity : the more necessary a good is the lower the elasticity
5- Duration : the longer a price change holds the higher the elasticity
6- Brand loyalty : an attachment to a certain brand result in more inelastic
demand
Price elasticity of supply
Rule PES = % change in quantity supplied / % change in price
Q 2−q 1
∗100
q1
P 2−P 1
∗100
P1
Factors affect the elasticity of supply
1- Spare production capacity
2- Stocks of finished products
3- Cost of factors substitution
4- Time period and production speed
Income elasticity
Rule IE = % change in quantity demand / % change in income
Cross price elasticity
CED = % change in quantity demanded in good A / % change in price of other
good