Economics

JUAN DIEGO CABELLO

ECONOMIST
juandiego.cabello@stgeorges.edu.pe

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C7 Introduction
Quantity demanded responsiveness to Real disposable
Price a change in: income

Demand is price elastic or income

BIG IMPACT
elastic SMALL
CHANGE

SMALL
IMPACT
Demand is price inelastic or income
inelastic
BIG CHANGE

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C7 Examples
Price elastic Price inelastic
demand demand

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C7 Price elasticity of demand
In measures the degree of responsiveness of quantity demanded for
a product caused by a change in its own price

But you can

ignore it
The PED is negative, due to the law of
demand

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Let’s practice!
Identify which of the following cases represent the most price
elastic demand:

1. The price has increased in 10%. As a 2. The price has decreased in 20%. As a
result, the quantity demanded result, the quantity demanded increased
decreased in 80% in 1%

3. The price has increased in 150%. As a

result, the quantity demanded
decreased in 5%

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Let’s practice!
Identify which of the following cases represent the most price
elastic demand:

1. The price of a product increased from 20 soles to 2. The price of a product decreased from 120 soles to
80 soles. As a result, the quantity demanded 80 soles. As a result, the quantity demanded
decreased from 2,000 units to 1,800 units. increased from 2,000 units to 4,800 units.

3. The price of a product increased from 20 soles to

25 soles. As a result, the quantity demanded
decreased from 2,000 units to 800 units.

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C7 Price elasticity of demand
The demand is price elastic.
PED > 1 Consumers are responsive to
changes in prices

The demand is price

PED < 1 inelastic. Consumers are
relatively unresponsive to
changes in prices

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C7 Price elasticity of demand

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C7 Degrees of PED values
Perfectly elastic demand. Demand
exists at one price only

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C7 Degrees of PED values
Unit elastic demand. A given price change of a product
leads to the same percentage change in the quantity
demanded

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C7 Determinants of price elasticity of demand
The number and closeness of The greater number of substitutes, the higher PED. Consumers can
substitutes readily switch to different substitute products or brands

Products regarded as essential tend to be price inelastic

The degree of necessity

The proportion of income The greater the proportion of consumers’ real income spent on a good,
spent on the product the more price elastic demand will be

Over time, a good tends to become more price elastic because

The time period
consumers have more time to find substitutes

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C7 Relationship between PED and total revenue
The PED shows changes in a firm’s revenue as a result of
price changes

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C7 Relationship between PED and total revenue

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C7 Commodities vs manufactured goods
Commodities

Lack close substitutes

They are essential in the production

processes

Low proportion of income required

Time needed to grow is longer

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C7 Commodities vs manufactured goods
Manufactured
products

Many close substitutes

The degree of necessity is lower

High proportion of income required

Time needed to produce is shorter

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C7 Importance of PED
Firms Government

Know the impact of a price change Possible impact of taxation

More information about customers Heavy taxes on demerit goods

(because the demand is highly price
inelastic)
Seasonal demand

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C7 Importance of PED

Indirect tax (tax imposed on

expenditure)

Tax burden (collected by the

government)

What other products could behave

like this?

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