Economics


Elasticity of Demand
Tutorial
Week 11 (21-4-2024)
Mahmoud Hany
 Outline

 Law of demand
 Elasticity
 Elasticity coefficient - formula
 Types of elasticity
 Perfect elasticity
 Imperfect elasticity
 Elastic demand
 Inelastic demand
 Unit elasticity
 Determinants of demand elasticity
 Law of Demand

 According to the law of demand the quantity demanded
of a good will rise as the price falls, and falls as the price
rises.

Price Quantity

Price Quantity

 Consumers tend to buy less when faced by higher prices,

but by how much?
 Example: if the price of laptops increases by 60% would
quantity demanded decrease by 60%? Or less? Or more?
 Demand Curve

Demand Curve
Price 60

50

40

30

20

10

0
0 1 2 3 4 5 6

Quantity demanded
 Elasticity

 Elasticity of demand is defined as “how responsive
the quantity demanded is to a change in price”

 The elasticity of demand is measured through what’s

called an elasticity coefficient or formula.
%∆Q
PED= _____________
(Price elasticity of demand)
%∆P

Elastic: Qd changes by a lot when price changes

Inelastic: Qd changes a little when price changes
 Types of Elasticity

 Perfect elasticity
 Perfect inelasticity
 Elastic demand
 Inelastic demand
 Unitary elasticity
 Perfect Elasticity

 A slight change in price would lead
to Qd=0
 The demand curve for a perfectly
elastic good is always horizontal.
 Example: imagine two vending
machines next to each other and
initially both sell Pepsi can for EGP
10. If one of them raises the price to
EGP 11 then all consumers will shift
to the other machine.
 Perfect Inelasticity

 No matter how the price changes
quantity demanded remains the
same as it does not respond to price
changes.
 The demand curve for a perfectly
inelastic good is always vertical.
 Imagine the demand curve for a life
saving drug: insulin for example.
 Both cases of perfect elasticity and
inelasticity are mostly theoretical.
 Elastic demand

 Elastic demand means that a change in price leads to
a siginifact or a great change in quantity demanded.
 How to measure? If PED>1 then we say the demand
is elastic.
 In other words it means the percentage change in
quantity demanded is greater than the percentage
change in price.
 Elastic demand

 Example: the price of coffee increased by 20% but its
quantity demanded fell by 40%.
%∆Q
PED= _____________
(Price elasticity of demand)
%∆P

-40 Elastic because

PED= _____________ = -2
the answer is
(Price elasticity of demand)
20 greater than 1

** When determining whether the good is elastic or inelastic always drop the (-) sign,
PED is calculated in absolute terms.
Elastic demand curve

 Inelastic demand

 Inelastic demand means that a change in price leads
to small change in quantity demanded.
 How to measure? If PED<1 the we say the demand is
inelastic.
 In other words, it means the percentage change in
quantity demanded is less than the percentage
change in price.
 Inelastic demand

 Example: the price of gasoline 92 increased by 35%
but its quantity demanded fell by 10%.
%∆Q
PED= _____________
(Price elasticity of demand)
%∆P

-10
PED= _____________
= - 0.285
(Price elasticity of demand)
35

Inelastic because
the answer is
less than 1
Inelastic demand curve

 Unitary Elasticity

 In unitary elasticity the percentage change in
quantity demanded is equal to the percentage
change in the price.
 If PED=1 then demand is unitary elastic.
 Unitary Elasticity

 Example: if price of airline tickets increase by 10%
and its quantity demanded decreases by 10% then
demand is unitary elastic.
%∆Q
PED= _____________
(Price elasticity of demand)
%∆P

-10 Unitary elastic

PED= _____________ = -1
(Price elasticity of demand) because the
10 answer equals 1
 Determinants of Elasticity

 What makes the demand for a good elastic or
inelastic?

 Availability of substitutes

 Degree of importance

 Price of the good compared to income

 Time dimension
 Availability of Substitutes

 More substitutes means more elasticity as consumers
can shift easily to other products when faced by price
changes.
 Less substitutes means less elasticity or inelasticity
because consumers cannot find alternatives.
 Examples: tea vs oil
 Degree of Importance

 Demand for basic goods or necessities is usually
inelastic.
 Demand for luxury goods on the other hand is
usually elastic.
 Example: bread vs leisure trips
 Price of the good compared to income


 If the price of the good represents a considerable
portion of income, then demand for it is likely to be
elastic.
 If the price of the good represents an insignificant
portion of income, then demand for it is likely to be
inelastic
 Example: buying a pack of matches vs buying a car.
 Time dimension

 Because consumers take time to adjust to new prices,
this happens by changing behavior and searching for
alternatives, therefore, demand is likely to be
inelastic in the short run but elastic in the long run.
 Example: imagine the effect of an increase in oil
prices in both short and long run.
 
Questions?
 

Thank you