Price Elasticity of

Demand/Price Elasticity of
Supply
2.3
2.4
 Price Elasticity of Demand
• Price Elasticity of Demand- the
measure of how responsive the
quantity demanded is to changes in
price
• The formula for finding the elasticity of
demand is:
• Ed= % change in quantity demanded
% change in price
Determinates of the price elasticity of demand
• 1- Availability of Close Substitutes- if there
are many substitutes, demand is elastic.
Determinates of the price elasticity of
demand
• 2- Necessities vs. Luxuries- if the good/service is
considered a luxury, the demand will be more
elastic.
Determinates of the price elasticity of
demand
• 3- % of budget- the larger the percentage of
your total budget the more elastic demand
will be.
Determinates of the price elasticity of
demand
• 4- Time- the longer consumers have to adjust to a
price change the more elastic the demand will be
Which one of these goods has the most elastic
demand?
 Value of Price Elasticity of Demand
• Inelastic Demand- quantity demanded doesn’t respond strongly to
changes in price
• Price Elasticity of Demand is less than one
• Elastic Demand- quantity demanded responds strongly to changes
in price
• Price Elasticity of Demand is greater than one.
• Unit Elastic- Qd changes by the same % as the price changes
• price elasticity of demand equals one
• Perfectly Elastic- Quantity demanded changes infinitely with any
change in price.
• Perfectly Inelastic- quantity demanded does not change with price
changes
•
 Total Revenue Test
PRICE TOTAL LEVEL OF ELASTICITY
REVENUE
DEMAND IS INELASTIC

DEMAND IS INELASTIC

DEMAND IS ELASTIC

DEMAND IS ELASTIC

Remember- Total Revenue is Price x Quantity

 Inelastic Demand vs. Elastic Demand
Price Price

p p

p’ p’

D
D
q q’ q q’
Quantity Quantity
Perfectly Inelastic Demand Perfect Elastic
Demand
Price D Price

p D

q Quantity Quantity
Elasticity varies along a linear demand
curve, it’s important to understand that
slope isn’t elasticity.
Demand is more elastic at lower P
quantities (higher prices) Elastic Range

Demand is more inelastic at higher

quantities (lower prices)
Inelastic Range

Q
 Price Elasticity of
Supply
• Elasticity of supply = % change in quantity supplied
% change in price
• Same with the price elasticity of demand, if the value
of elasticity of supply is >1, supply is elastic.
• If it’s <1, supply is inelastic.
Determinates of the price elasticity of
supply
• 1- the ease and speed of getting new products
into the marketplace.
• Ex- the supply of beachfront land is perfectly
inelastic
• Ex- the supply of Jiffy Mix is relatively elastic
 Determinates of the price elasticity of
supply
• 2- Time- the longer producers have to
adjust to prices changes the more elastic
the supply is.
• Example- oil producers can’t immediately
pump more oil from their rigs in the short-
run. If the price increases then in the long-
run they would find ways to drill for more
oil, making supply more elastic.
 Inelastic Supply vs. Elastic Supply
Price S Price

p’
S
p’

p p

q q’ q’
Quantity q Quantity
Perfectly Elastic Supply Perfectly Inelastic
Supply
Price Price S

p S

q
Quantity Quantity
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