Economics Grade 9IG

UNIT 11 PRICE ELASTICITY

OF DEMAND

Aim:
 price elasticity of demand
 calculate the price elasticity of demand
 interpret price elasticity of demand figures
Definition of Price Elasticity of Demand

Price elasticity of demand (PED) measures the extent to which the

quantity demanded changes when the price of the product changes.
The formula is:
Percentage change ∈quantity demanded
PED=
Percentage change ∈ price
Calculating PED
To work out price elasticity of demand, using an example where
quantity demanded increased from 200 to 240 as a result of price
falling from $10 to $9, you:
1) Calculate the percentage change in quantity demanded and
the percentage change in price.
In this case, the percentage change in quantity demanded is:
 Calculating PED
And the percentage change in price is:

2) When these changes have been calculated, the percentage

change in quantity demanded is divided by the percentage in
price to give the PED.

PED = 20% / -10% = -2

INDIVIDUAL ACTIVITY 1 (Page 74)
Interpretation of PED
The PED figure provides two pieces of information:
 One is given by the sign. If it is negative it means that demand
and price are inversely related.
The other is given by the size. This indicates the extend by which
demand will extend or contract when price changes. A figure of -2,
for example, indicates that a 1% change in price will cause a 2%
change in quantity demanded.
INDIVIDUAL ACTIVITY 2 (Page 75)
Elastic and Inelastic Demand
Most products have either elastic or inelastic demand. Elastic
demand occurs when a change in price results in a greater
percentage change in quantity demanded. The PED figure will be
(ignoring the negative sign) more than 1 but less than infinity.
This figure shows that the percentage change in
quantity demanded is greater than the percentage
change in price

This figure shows that the percentage change in

quantity demanded is greater than the percentage
change in price
Elastic and Inelastic Demand
Inelastic demand is when the quantity demanded changes by a
smaller change than the price. The PED is less than 1 but greater
than 0.

This figure shows that the percentage change in

price is greater than the percentage change in
quantity demanded
 Determinants of Price Elasticity of
Demand
The main factor determining whether demand is elastic or inelastic is the
availability of substitutes of a similar quality and price.
The other influencing factors (all linked to the availability of substitutes)
include:
The proportion of income spent on the product

Whether the product is a necessity or a luxury

Whether the product is addictive or not

Whether its purchase can be postponed

How the market is defined

The time period under consideration

GROUP ACTIVITY 1 (Page 77)
 Differences in PED
PED for the same products can differ with time. What were
once seen as luxuries can turn into necessities as people become
richer. This changes their demand from elastic to inelastic.
Due to different tastes, different income levels and different
cultures, PED can also be found to vary between countries.

Other degrees of elasticity

1. Perfectly elastic demand occurs when a

change in price causes a complete change
in demand. A firm can sell any quantity at
the going market price, for example Q1 or
Q2, but nothing above this price. In this
case, PED is infinity (∞).
 Other Degrees of Elasticity

1. Perfectly inelastic demand is when

demand does not change when price
changes. Consumers buy the same quantity
despite the changes in price. PED is 0.

1. Unit elasticity of demand is found when a

percentage change in price results in an
equal percentage change in demand. PED is
1 (unity).
PED and the Total Spending on a
Product and Revenue Gained
 When demand is inelastic, a change in price will cause total revenue to move
in the same direction. So a rise in price will cause total revenue to rise.
 When demand is perfectly inelastic, a change in price will not only cause
revenue to move in the same direction but also by the same percentage.
o 50 units are sold at $10. Total revenue is $500. If the price is increased by
20% to $12, quantity demanded would stay the same at 50 and so revenue
would rise by 20% to $600.
 When demand is elastic, a change in price results in revenue moving in the
opposite direction. A rise in the price will cause total revenue to fall.
 When demand is perfectly elastic, a rise in price will cause demand to fall to
zero.
 In the case of unit elasticity of demand, price and demand change by the
same percentage, so the total revenue remains unchanged.
 Changes in PED
PED becomes more elastic as the price of a product rises. Consumers
become more sensitive to price changes, the higher the price of the
product. At one point, demand would be perfectly elastic if the supplier
keeps raising the price.
As the price falls, demand becomes more inelastic. If price falls to zero,
there will be a limit to the amount people want to consume. Demand is
then perfectly inelastic.
At the mid-point there is unit PED, with percentage change in quantity
demanded matching the percentage change in price.
Changes in PED
PED also changes when there is a shift in the demand curve. The more
consumers are willing and able to buy a product, the less sensitive they
are to price changes.
So, a shift in the demand curve to the right decreases the PED at any
given price, making it more inelastic.
In the figure below, PED is initially -5 (50%/-10%) when price falls from
$10 to $9. Then when demand increases to D1D1, PED falls to -2.5
(25%/-10%).
The Effect of an Increase in Demand
on PED
When the demand curve shifts to the left, consumers become more
sensitive to changes in price, making demand more elastic and raising
the PED. In the figure below PED rises from -5 (50%/-10%) to -10
(100%/-10%).
INDIVIDUAL ACTIVITY 3 (Page 80)
Implications of PED for Decision
Making
 Consumers benefit from lower prices and higher quality when
demand is elastic. This is because:
o producers would be reluctant to raise price as demand would
contract by a greater percentage and revenue would fall.
o producers have to provide good quality products because of
the existence of close substitutes
 A producer may try to make the firm’s product more distinctive
to discourage consumers from switching to other firms’
products. This would make the demand for the product more
price inelastic and give the producer more power to raise price.
 A government needs to know the price elasticity of a product
when taking decisions on its subsidy and taxation policies.