Elasticity

Price elasticity of demand

The extent to which the quantity demanded

changes when the price of the product changes.

The responsiveness of quantity

demand to a changes in its price.
 PED can be calculated!
•
 In each case calculate PED;
a) A fall in price from $4 to $3 causes the
demand to extend from 60 to 105.
b) Demand falls from 200 to 180 when price
rises from $10 to $12.
c) A reduction in price from $12 to $6 results
in an extension in demand from 100 to
140.
d) The percentage change in quantity
demanded is 2 and its PED is 0.5, what
would be the percentage change in price.
 Interpretation of PED
• The sign
• The size / value
 Elastic and inelastic demand
• Can determine depending on the PED value

• Elastic when PED > 1

• Inelastic when PED < 1

 Elastic demand
• Elastic demand occurs when a change in price
results in a greater percentage change in
quantity demanded.
• PED > 1 but less than infinity
• Example; 10 products may initially be
demanded at a price of $5 each. If the price
falls to $4 each, demand rises to 20.
Elastic demand curve

Price

5
4
D

0
10 20
Quantity demanded
 Inelastic demand
Inelastic demand occurs when the quantity
demand changes by a smaller change than the
price.
PED < 1 but greater than 0
Example; A rise in price from $6 to $11 causes
the demand to contract from 30 to 20.
Inelastic demand curve

Price

11

0
20 30
Quantity demanded
Elasticity & the Total Revenue
 Determinants of price elasticity of
demand

Availability of close substitutes ; similar quality and price

The proportion of income spent on the product

The nature of the product
The time taken to purchase

The products that are habit forming

 Other degrees of elasticity
• Perfectly elastic demand
• Perfectly inelastic demand
• Unit elasticity of demand