Dr.

Abdelhalim Mahmoud
 Market Equilibrium
Price
S
D
Surplus

Shortage

Quantity

Qd Qs Qs Qd
price
Change (increase) supply
S S1
D

Increase

Qs , Qd

The result is: increasing Q , Decreasing P

price
Change (Decrease) supply
S1 S
D

e decrease

Qs , Qd

The result is: Decreasing Q , increasing P

 Change in both: increase supply &
price D1 increase demand
S S1
D increase
increase

e
e

Qs , Qd

The result is: increasing Q , almost same P

price
D1
S S1
increase increase
D

Qs , Qd

The result is: increasing Q , increasing P

2nd Assignment Define the effect in each situation:

• supply side or Demand side

• Quantity and Price

Covid 19 Russian Ukrainian War Higher Oil prices Cutting Income taxes

Employee unions High Inflation Black Friday Mo Salah released an

negotiated successfully soon advertising campaign
for salary increases
The responsiveness (or

sensitivity) of consumers to a

price change is measured by a

product’s price elasticity of

demand.
Elimination of Minus Sign

Economists usually ignore the minus sign and simply present the
absolute value of the elasticity coefficient
Assume there are two customers, each one of them consume 10 units when
the price is 20 L.E. According to Demand Law, if the price had risen to 24
L.E. each consumer will decrease the quantity but in different ratio.

Consumer 2 Consumer 1 Price

10 10 20

9 7 24
Perfectly
Elastic
 Consumer 2 Consumer 1 Price

10 10 20

9 7 24

∆𝑸 𝑷𝟏
PED = ×
∆𝑷 𝑸𝟏

𝟕 − 𝟏𝟎 𝟐𝟎 −𝟑 𝟐𝟎
PED1 = × = × = - 1.5
𝟐𝟒 − 𝟐𝟎 𝟏𝟎 𝟒 𝟏𝟎

𝟗 − 𝟏𝟎 𝟐𝟎 −𝟏 𝟐𝟎
PED2 = × = × = - 0.5
𝟐𝟒 − 𝟐𝟎 𝟏𝟎 𝟒 𝟏𝟎

Price Elasticity of Demand has a negative sign.

 Quantity Price

10 20

7 24

∆𝑸 𝑷𝟏
PED = ×
∆𝑷 𝑸𝟏

𝟕 −𝟏𝟎 𝟐𝟎 −𝟑 𝟐𝟎
Elasticity(Price Increase) = × = × = - 1.5
𝟐𝟒 − 𝟐𝟎 𝟏𝟎 𝟒 𝟏𝟎

𝟏𝟎 − 𝟕 𝟐𝟒 𝟑 𝟐𝟒
Elasticity (Price Decrease) = × = × = - 2.6
𝟐𝟎 −𝟐𝟒 𝟕 −𝟒 𝟕
 Quantity Price

10 20

7 24

∆𝑸 𝑷𝟏+𝑷𝟐
PED = ×
∆𝑷 𝑸𝟏+𝑸𝟐

𝟏𝟎 − 𝟕 𝟐𝟎+𝟐𝟒 −𝟑 𝟒𝟒
PED = × = × = - 1.9
𝟐𝟎 − 𝟐𝟒 𝟏𝟎+𝟕 𝟒 𝟏𝟕

𝟕 − 𝟏𝟎 𝟐𝟎+𝟐𝟒 𝟑 𝟒𝟒
PED = × = × = - 1.9
𝟐𝟒 −𝟐𝟎 𝟏𝟎+𝟕 −𝟒 𝟏𝟕
Why do we use percentage change instead of absolute change?

For two reasons:

1- Avoiding different measuring units:
For example: dollar Vs. cent , Kg Vs. ton

P Q P Q P Q

3.5 70 350 70 3.5 70000

3 95 300 95 3 95000

Elasticity -2.5 Elasticity -2.5 Elasticity -2.5

Abs. Change -50 Abs. Change -0.5 Abs. Change -50000

Why do we use percentage change instead of absolute change?

For two reasons:

2- compare correctly between different products

Cars Koshari

P Q P Q

100000 20 8 600

105000 15 10 550

Elasticity -5 Elasticity -0.33

Abs. Change -0.001 Abs. Change -25

Price

P2

ED=0

P1

Quantity
Q Demanded
Price
D

P2

ED<1

P1

Quantity
Q2 Q1 Demanded
Price

P2

ED=1

P1

Quantity
Q2 Q1 Demanded
Price

P2
ED>1

P1

Quantity
Q2 Q1 Demanded
Price

D ED=∞
P1

Quantity
Q2 Q1 Demanded
Determinants of Price Elasticity of Demand

Substitutability Generally, the larger the number of substitute goods

that are available, the greater the price elasticity of demand.
Determinants of Price Elasticity of Demand

Proportion of income Other things equal, the higher the price of a good
relative to consumers’ incomes, the greater the price elasticity of demand.
Determinants of Price Elasticity of Demand

Luxuries versus necessities In general, the more that a good is

considered to be a “luxury” rather than a “necessity,” the greater is the price
elasticity of demand.
Determinants of Price Elasticity of Demand

Time Generally, product demand is more elastic the longer the time period
under consideration. Consumers often need time to adjust to changes in prices.
For example, when the price of a product rises, time is needed to find and
experiment with other products to see if they are acceptable.
Pricing Strategy:
Producers ability to raise prices is affected by price elasticity ( responsiveness
of consumers). In the Perfect competition markets there is no control for
producers ( Price takers not price setters ).
There is a significant relationship between elasticity and total revenue.
Sometimes decreasing prices lead to increasing
revenue, sometimes not.

Feasibility Studies:
Elasticity is useful when forecasting demand
and consumer behavior
• Tax policy

• Balance of payment deficit

• Income Elasticity

• Cross Elasticity

• Advertising spending elasticity

 Relationship between Elasticity & Total Revenue

Absolute Effect on total revenue

value of
Demand type Description
elasticity
coefficient Increasing Decreasing
price price
% change in
Qd is greater
Greater than 1 Elastic T R decreases T R increases
than % change
in price
% change in
Qd is less than T R increases T R decreases
Less than 1 In-elastic
% change in
price
% change in
Qd is equal to Almost no Almost no
Equal 1 Unit elastic
% change in change change
price
Cross elasticity of demand

It shows the relationship between quantity demanded of one good and

prices of related goods (substitutes or complements).

• We have to calculate cross elasticity before changing pricing strategy

• Increased sales might be due to declining sales of our company other
products, not due to increasing market share.