FIGURE 4.

4
Individual and Market Demand Curves for Canned Tuna

Market
demand
curve

The quantity demanded at any price on the market demand curve in panel (c) is the sum of the
individual quantities in panels (a) and (b) demanded at any price.

Principles of Microeconomics, 2nd Canadian Edition Slide 1-1 Copyright © 2005 McGraw-Hill Ryerson Limited
V. Price Elasticity of Demand

How large is the percentage change in sales

when the price changes by 1% ?
 Price Elasticity of Demand

 Price elasticity of demand is defined as:

 the % change in the quantity of a good demanded resulting
from a one % change in its price
 the price elasticity of demand is negative,
 for convenience we will take the absolute value

Principles of Microeconomics, 2nd Canadian Edition Slide 1-3 Copyright © 2005 McGraw-Hill Ryerson Limited
 FIGURE 4.12
Graphical Interpretation of Price Elasticity of Demand

Price elasticity of demand at any point along a straight-line demand curve is the ratio of price to
quantity at that point times the reciprocal of the slope of the demand curve.

Principles of Microeconomics, 2nd Canadian Edition Slide 1-4 Copyright © 2005 McGraw-Hill Ryerson Limited
 Price Elasticity – three particular cases:

 Elastic Demand
 price elasticity is greater than one
 Because the % change in quantity sold exceeds the % change
in prices, change in quantities dominates

 Inelastic Demand
 price elasticity is less than one
 Because the % change in prices exceeds the % change in
quantities, change in prices dominates

 Unit elastic Demand

 price elasticity equals one (dividing line case)
 % change in price = % change in quantity sold

Principles of Microeconomics, 2nd Canadian Edition Slide 1-5 Copyright © 2005 McGraw-Hill Ryerson Limited
Principles of Microeconomics, 2nd Canadian Edition Slide 1-6 Copyright © 2005 McGraw-Hill Ryerson Limited
Principles of Microeconomics, 2nd Canadian Edition Slide 1-7 Copyright © 2005 McGraw-Hill Ryerson Limited
Principles of Microeconomics, 2nd Canadian Edition Slide 1-8 Copyright © 2005 McGraw-Hill Ryerson Limited
Principles of Microeconomics, 2nd Canadian Edition Slide 1-9 Copyright © 2005 McGraw-Hill Ryerson Limited
 FIGURE 4.11
Elastic and Inelastic Demand

Principles of Microeconomics, 2nd Canadian Edition Slide 1-10 Copyright © 2005 McGraw-Hill Ryerson Limited
 Some Estimated Price Elasticities of Demand

Good Price elasticity

Inelastic demand

Eggs 0.1
Beef 0.4
Stationery 0.5
Gasoline 0.5

Elastic demand

Housing 1.2
Restaurant meals 2.3
Airline travel 2.4
Foreign travel 4.1

Principles of Microeconomics, 2nd Canadian Edition Slide 1-11 Copyright © 2005 McGraw-Hill Ryerson Limited
 Determinants of the Price Elasticity of Demand

 Substitution possibilities
 Price elasticity of demand will be relatively high if it is easy
to substitute between products

 Budget share
 Items that take up a larger share of the budget tend to have
higher price elasticities of demand

 Time

 Because substitution often takes time, price elasticity will

usually be higher in the long run than in the short run

Principles of Microeconomics, 2nd Canadian Edition Slide 1-12 Copyright © 2005 McGraw-Hill Ryerson Limited
 Other Elasticities of Demand

 Income Elasticity of Demand

 The percentage amount by which the quantity demanded
changes in response to a one-percent change in income

Q
Q
Income elasticity 
I
I

Principles of Microeconomics, 2nd Canadian Edition Slide 1-13 Copyright © 2005 McGraw-Hill Ryerson Limited
 Normal Goods and Inferior Goods

 When the income elasticity of demand is positive, the good is a

normal good — that is, the quantity demanded at any given price
increases as income increases

 When the income elasticity of demand is negative, the good is an

inferior good — that is, the quantity demanded at any given price
decreases as income increases

Principles of Microeconomics, 2nd Canadian Edition Slide 1-14 Copyright © 2005 McGraw-Hill Ryerson Limited
 Other Elasticities of Demand (b)

 Cross Price Elasticity of Demand

 The percentage amount by which the quantity demanded of
one good changes in response to a one-percent change in
the price of another good

Q X
QX
Cross - price elasticity 
PY
PY

Principles of Microeconomics, 2nd Canadian Edition Slide 1-15 Copyright © 2005 McGraw-Hill Ryerson Limited