This document discusses price elasticity of demand. It defines price elasticity of demand as a measurement of how quantity demanded responds to a change in price. It then provides examples of inelastic, elastic, and unit elastic demand and describes how to quantitatively measure price elasticity. The document also discusses determinants of price elasticity and how businesses can apply the concept through pricing strategies.

1. Price Elasticity of
Demand
Group 2:
Aamer Abdul Razzak
Muhammad Afeef
Muhammad Nauman
Syed Zakauddin

2. Outline
• Elasticity
• Price Elasticity of Demand (PED)
• Quantitative Measurement of PED
• Examples of PED
• Types of PED Curves
• Determinants of PED
• Business Application of PED

4. Elasticity
• Elasticity is the measurement of how
an economic variable responds to a
change in another It gives answers to
questions such as:
 If I lower the price of a product, how
much more will I be able to sell?
 If I raise the price of one good, how
will that affect sales of the other
good?

5. Price Elasticity of Demand (PED)
• Price elasticity of demand measures how much Quantity Demand (Qd)
responds to a change in Price (p)
Price elasticity of
demand =
Percentage change in Qd
Percentage change in P
P
Q
D
Q2
P2
P1
Q1

6. Quantitative Measurement of PED
PED = 0
• demand is
“Perfectly
Inelastic”
• e.g.
Kohinoor
Diamond
PED
between 0
& 1
• demand is
“Inelastic”
• e.g. petrol
PED = 1
• demand is
“Unit
Elastic”
PED > 1
• demand is
“Elastic”
• e.g. Coke
PED is
infinity,,
• demand is
“Perfectly
Elastic”
• e.g.
Bananas (or
other
homogenous
products).

7. Examples of Price Elasticity of Demand
Inelastic Demand
• When the price of gasoline rises by 1% the quantity
demanded falls by 0.2%, so gasoline demand is not very
price sensitive.
 Price elasticity of demand is 0.2 .
Elastic Demand
• When the price of gold jewelry rises by 1% the quantity
demanded falls by 2.6%, so jewelry demand is very price
sensitive.
 Price elasticity of demand is 2.6 .

8. Examples of Elasticity
Unit Elastic Demand
• When the price of Laptops rises by 1% the quantity
demanded falls by 1%, so laptop demand is in line with
the prices.
 Price elasticity of demand is 1 .

9. Types of PED Curves
Elastic Curve:
For a small % change in price
(P1 to P2), there is a larger %
change in quantity (Q1 to Q2).
The demand curve appears more
horizontal.
D
P
Q
P1
Q
1
Q
2
P2

10. Types of PED Curves (contd.)
Inelastic Curve:
For a larger % change in price
(P1 to P2), there is a smaller %
change in quantity demanded
(Q1 to Q2).
The curve appears to be more
vertical.
D
P
Q
P1
Q
1
Q
2
P2

11. Types of PED Curves (contd.)
Perfectly Inelastic Curve:
For a % change in price (P1 to P2),
there is no % change in quantity
demanded (Q1 = Q2).
An example of perfectly inelastic
demand would be a lifesaving drug
that people will pay any price to
obtain. Even if the price of the drug
were to increase dramatically, the
quantity demanded would remain the
same
Q1
P1
P2
D
P
Q

12. Types of PED Curves (contd.)
Perfectly Elastic Curve
This is no change in price (P1 =
P2), however, there is %change in
quantity demanded (Q1 to Q2).
All goods in a perfect competition
market are perfectly elastic.
Examples includes Currency
exchange market.
D
P
Q
P1
Q1
P changes
by 0%
Q changes by any %
Q2
P2
=

13. Determinants of Price Elasticity of
Demand
Determinant Elastic Inelastic
Availability of substitutes High
(Cold Drinks)
Low
(Antiques)
Time horizon Longer
(Over 1 year)
Shorter
(less than 1 year)
Category of a product Specific
(Levis)
Broad
(Jeans)
Necessity vs. Luxury Luxury
(BMW)
Necessity
(Public Transport)
Purchase price (relative to income) High
(Gold)
Low
(Mobile phones)

14. Business Application of
PED
Ride Hailing Applications: UBER & CAREEM
 Both organizations make effective use of the concept of price elasticity
of demand
 During Peak Hours, where demand of rides is more than the supply of
cars, their rates are higher.
 During Off-peak Hours, where supply of cars is more than the demand
for rides, their rates are cheaper and discounts are offered.
 Thus both companies strive to increase their revenues in any given
timeframe according to the demand.
 Price elasticity of a product affects:
a. Pricing Policies
b. Marketing Approach

15. Income elasticity of demand
• Income elasticity of demand refers to the sensitivity of the quantity
demanded for a certain good to a change in income.
Income elasticity of
demand =
Percentage change in Qd
Percentage change in I

16. Income elasticity of demand
Suppose that the initial income of a person is Rs.2,000 and
quantity demanded for the commodity by him is 20 units.
When his income increases to Rs.3,000, quantity
demanded by him also increases to 40 units. Find out the
income elasticity of demand.
% change of income 50%
% change in commodity 100%
Income elasticity of demand 2

17. Cross Price Elasticity of Demand
• Cross price elasticity measures the responsiveness of demand for good
X following a change in the price of a related good Y
• The related goods can be either supplementary goods or complementary
goods
Cross Price elasticity
of demand =
Percentage change in QdX
Percentage change in Py

18. Any
Questions?
Thank you!