The document discusses price elasticity of demand, which measures how much demand for a good changes in response to changes in price. It defines five types of price elasticity: unit elasticity, where demand changes proportionally to price; more elastic, where demand changes more than proportionally; more inelastic, where demand changes less than proportionally; perfectly inelastic, where demand does not change with price; and perfectly elastic, where price does not change with demand. Factors like availability of substitutes, whether a good is a necessity or luxury, time horizon, and price relative to income determine a good's price elasticity.

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MicroeconomicsMicroeconomics
Price Elasticity ofPrice Elasticity of
DemandDemand

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MicroeconomicsMicroeconomics
Preparing this term paper on “PricePreparing this term paper on “Price
Elasticity of Demand” was a wonderfulElasticity of Demand” was a wonderful
experience for us. We would like to thankexperience for us. We would like to thank
our faculty, Mrs. Monsura Zaman,our faculty, Mrs. Monsura Zaman,
Lecturer in Economics,Lecturer in Economics, Faculty of BusinessFaculty of Business
ASA University Bangladesh for giving usASA University Bangladesh for giving us
this opportunity as well as for herthis opportunity as well as for her
guidance. Finally we would like to thankguidance. Finally we would like to thank
our family and almighty Allah forour family and almighty Allah for
supporting us the courage to carry on oursupporting us the courage to carry on our
work.work.

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MicroeconomicsMicroeconomics
Price Elasticity of DemandPrice Elasticity of Demand
The responsiveness or sensitivity of consumersThe responsiveness or sensitivity of consumers
to a price change is measured by a product’sto a price change is measured by a product’s
Price elasticity of demandPrice elasticity of demand Price elasticity ofPrice elasticity of
demand shows that how much quantitydemand shows that how much quantity
demanded of a commodity changes when itsdemanded of a commodity changes when its
price changes. The most common elasticityprice changes. The most common elasticity
measurement is that of price elasticity ofmeasurement is that of price elasticity of
demand. It measures how much consumersdemand. It measures how much consumers
respond in their buying decisions to a changerespond in their buying decisions to a change
in price.in price.

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MicroeconomicsMicroeconomics
There are five types of price elasticity of demand:There are five types of price elasticity of demand:
Unit elasticityUnit elasticity
More elasticityMore elasticity
More inelasticMore inelastic
Perfectly inelasticPerfectly inelastic
Perfectly elasticPerfectly elastic

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MicroeconomicsMicroeconomics
Price elasticity can be measured with thePrice elasticity can be measured with the
following equation-following equation-
Price elasticity of demand =
% change in price
% change in quantity

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MicroeconomicsMicroeconomics
Unit
elasticity(Ed=1)
Unit
elasticity(Ed=1)

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MicroeconomicsMicroeconomics
Unit
elasticity(Ed=1)
A change in the price of a good will bringA change in the price of a good will bring
about a proportionate change in theabout a proportionate change in the
quantity demanded. That means thequantity demanded. That means the
rate of change between price andrate of change between price and
quantity demanded is same. If pricequantity demanded is same. If price
decrease 50 percent then quantitydecrease 50 percent then quantity

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MicroeconomicsMicroeconomics
Price = 4, 3 & Quantity Demanded=Price = 4, 3 & Quantity Demanded=
120, 150120, 150
When price is 4tk, quantity demanded isWhen price is 4tk, quantity demanded is
120. When price decreases from 4tk to120. When price decreases from 4tk to
3tk then quantity demanded is also3tk then quantity demanded is also
changed but proportionately. Then thechanged but proportionately. Then the
quantity demanded is 150.quantity demanded is 150.

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MicroeconomicsMicroeconomics
Here,Here,
Price=4, Qd=120Price=4, Qd=120
Price=3, Qd=150Price=3, Qd=150
Qd=150-120=30Qd=150-120=30
P = 4-3= 1P = 4-3= 1
By using equation we can say,By using equation we can say,
Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd)
= (30/1 × 4/120)= (30/1 × 4/120)
=1

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MicroeconomicsMicroeconomics
0
D''
120 Quantity demand150
3
4
ED = –1
A Unit Elastic Demand Curve
Price
Figure 1.1 Unit Elasticity

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MicroeconomicsMicroeconomics
More Elasticity(Ed>1)More Elasticity(Ed>1)

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MicroeconomicsMicroeconomics
More Elasticity(Ed>1)
A small change in the price of theA small change in the price of the
commodity leads to a more thancommodity leads to a more than
proportionate change in the quantityproportionate change in the quantity
demanded. That means change in thedemanded. That means change in the
quantity demanded is greater than change inquantity demanded is greater than change in
price.price.
Luxurious goods like video cassette andLuxurious goods like video cassette and
television and substitutes goods are includedtelevision and substitutes goods are included
in more elastic demand.in more elastic demand.

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MicroeconomicsMicroeconomics
Price = 4,3Quantity Demanded=120,160Price = 4,3Quantity Demanded=120,160
When price is 4tk, quantity demanded isWhen price is 4tk, quantity demanded is
120. When price decreases from 4tk to120. When price decreases from 4tk to
3tk then quantity demanded is3tk then quantity demanded is
increased at a greater rate fromincreased at a greater rate from
proportionate change that is 120 toproportionate change that is 120 to
160.The change is more than160.The change is more than
proportionate change.proportionate change.

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MicroeconomicsMicroeconomics
Here,Here,
Price=4, Qd=120Price=4, Qd=120
Price=3, Qd=160Price=3, Qd=160
Qd=160-120=40Qd=160-120=40
P = 4-3= 1P = 4-3= 1
By using equation we can say,By using equation we can say,
Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd)
= (40/1 × 4/120)= (40/1 × 4/120)
=1.33=1.33

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MicroeconomicsMicroeconomics
0
D
Quantity demand160120
3
ED > 1
A More Elastic Demand Curve
Price
Figure 1.2 More Elasticity

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MicroeconomicsMicroeconomics
More Inelastic(Ed<1)More Inelastic(Ed<1)

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MicroeconomicsMicroeconomics
More Inelastic(Ed<1)
A change in price will bring about a less thanA change in price will bring about a less than
proportionate change in the quantity demanded.proportionate change in the quantity demanded.
That means the change in the quantity demandedThat means the change in the quantity demanded
is lower than change in price.is lower than change in price.
Basic necessities goods (rice, salt) are included in thisBasic necessities goods (rice, salt) are included in this
case.case.
Price = 4, 3 Quantity Demanded = 120, 140Price = 4, 3 Quantity Demanded = 120, 140

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MicroeconomicsMicroeconomicsWhen price is 4tk, quantity demanded is 120. WhenWhen price is 4tk, quantity demanded is 120. When
price decreases from 4tk to 3tk then quantityprice decreases from 4tk to 3tk then quantity
demanded is increased at a lower rate fromdemanded is increased at a lower rate from
proportionate change that is 120 to 160.proportionate change that is 120 to 160.
Here,Here,
Price=4, Qd=120Price=4, Qd=120
Price=3, Qd=140Price=3, Qd=140
Qd=140-120=20Qd=140-120=20
P = 4-3= 1P = 4-3= 1
By using equation we can say,By using equation we can say,
Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd)
= (20/1 × 4/120)= (20/1 × 4/120)
=0.66=0.66

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MicroeconomicsMicroeconomics
0
D
Quantity demand
4
3
120 140
A More Inelastic Demand Curve
ED < 1
Price
Figure 1.3 More Inelastic

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MicroeconomicsMicroeconomics
Perfectly
Inelastic(Ed=0)
Perfectly
Inelastic(Ed=0)

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MicroeconomicsMicroeconomics
Perfectly Inelastic(Ed=0)
The quantity demanded is totally unresponsive toThe quantity demanded is totally unresponsive to
changes in price that means there is no change inchanges in price that means there is no change in
quantity demanded when its price changes.quantity demanded when its price changes.
Price = 4, 3 & Quantity Demanded =120, 120Price = 4, 3 & Quantity Demanded =120, 120
When price is 4tk, quantity demanded is 120. WhenWhen price is 4tk, quantity demanded is 120. When
price decreases from 4tk to 3tk then quantity demandedprice decreases from 4tk to 3tk then quantity demanded
are still 120. There is no change in quantity demanded...are still 120. There is no change in quantity demanded...

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MicroeconomicsMicroeconomics
Here,Here,
Price=4, Qd=120Price=4, Qd=120
Price=3, Qd=120Price=3, Qd=120
Qd=120-120=0Qd=120-120=0
P = 4-3= 1P = 4-3= 1
By using equation we can say,By using equation we can say,
Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd)
= (0/1 × 4/120)= (0/1 × 4/120)
=0=0

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MicroeconomicsMicroeconomics
Quantity0
D'
ED = 0
120
3
4
Price
A Perfectly Inelastic Demand Curve
Figure 1.4 Perfectly Inelastic

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MicroeconomicsMicroeconomics
Perfectly elastic(Ed=
∞)
Perfectly elastic(Ed=
∞)

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MicroeconomicsMicroeconomicsPerfectly elastic(Ed= ∞)
The prices of a commodity is totally unresponsiveThe prices of a commodity is totally unresponsive
to changes in quantity demanded that meansto changes in quantity demanded that means
there is no change in price when quantity demandthere is no change in price when quantity demand
changes.changes.
Price = 4, 4 & Quantity Demanded = 120, 150Price = 4, 4 & Quantity Demanded = 120, 150
When price is 4tk, quantity demanded is 120.When price is 4tk, quantity demanded is 120.
When no change in price brings a change inWhen no change in price brings a change in
quantity demanded from 120 to 150. There is noquantity demanded from 120 to 150. There is no
change in price of a commodity...change in price of a commodity...

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MicroeconomicsMicroeconomicsHere,Here,
Price=4, Qd=120Price=4, Qd=120
Price=4,Price=4, Qd=150Qd=150
Qd=150-120=30Qd=150-120=30
P = 4-4= 0P = 4-4= 0
By using equation we can say,By using equation we can say,
Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd)
= (30/0 × 4/120)= (30/0 × 4/120)
= ∞

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MicroeconomicsMicroeconomicsA Perfectly Elastic Demand Curve
0
D
ED =
4
Quantity120 150
Price
Figure 1.4 Perfectly Elastic

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MicroeconomicsMicroeconomics
Factors that determine theFactors that determine the
priceprice
Elasticity of demandElasticity of demand
1. Availability of close substitutes - price elasticity of1. Availability of close substitutes - price elasticity of
demand will tend to be:demand will tend to be:
- High if there are close substitutes.- High if there are close substitutes.
- Low if there are no close substitutes.- Low if there are no close substitutes.
2. Necessities vs. luxury goods - price elasticity of2. Necessities vs. luxury goods - price elasticity of
demand tend to be:demand tend to be:

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MicroeconomicsMicroeconomics
3. Time - long-run p rice elasticity of demand is often3. Time - long-run p rice elasticity of demand is often
higher than the short-run elasticityhigher than the short-run elasticity
4. Price relative to income - price elasticity of demand4. Price relative to income - price elasticity of demand
will tend to be:will tend to be:
- High if the price of the good is high relative to income- High if the price of the good is high relative to income
- Low if the price of the good is low relative to income- Low if the price of the good is low relative to income

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THE END