This document discusses elasticity, which measures how responsive quantity demanded is to changes in price. It defines price elasticity of demand and explains that demand is elastic when a percentage change in quantity demanded is greater than the percentage change in price, and inelastic when the opposite is true. Elastic goods have substitutes and inelastic goods are often necessities. The document provides examples of calculating price elasticity using demand curves and formulas. It illustrates different types of elasticity including perfectly elastic, inelastic, unitary, and inbetween cases.

1. Elasticity
“Elasticity is a measure of
the extent to which a
quantity responds to a
change in a variable.”

2. Price Elasticity of Demand
“The responsiveness of
Demand to a change in price.”
Elastic
Percentage change in
Demand will be
Greater than change in price.
Inelastic
Percentage change in
price will be
Greater than change in demand.

3. Price Elastic Goods
• Very responsive to Price changes
• Many Substitutes (undifferentiated)
• Products widely available

4. Price
Inelastic Goods
• Less responsive to Price changes
• *** Inelastic goods are still affected by price rises! ***
• Inelastic goods tend to be…
–
–
–
–
–
Highly branded (highly fashionable)
Innovative
In short supply
Few Substitutes
Habit Forming

5. Calculating P.E.D.
P.E.D. = Percentage change in Demand
Percentage change in Price
% Change = Difference x 100 = _____ %
Original

6. Calculating P.E.D.
Value
• 0
Description
Perfectly Inelastic
Explanation
Price has no effect on
demand at all
• 0<1
Inelastic
Price has a small effect
on demand
• 1
Unitary
Changes are the same
• 1<Infinity
Elastic
Demand is very sensitive to
price
• Infinity
Perfectly
Elastic
Any Increase in price, kill
demand

7. A Demand Curve of an Elastic Good
Price
250
200
150
D
100
50
0
100
200
300
400
500 600
Quantity Demanded

8. Total Revenue at 150THB
Price
250
200
150
D
100
600 x 150
50
0
100
200
300
400
500 600
Quantity Demanded

9. Total Revenue at 200THB
Price
250
200
150
D
100
200 x 100
50
0
100
200
300
400
500 600
Quantity Demanded

10. A Demand Curve of an Elastic Good
Price
Revenue Gained
Due To Price
Increase
250
200
150
D
Revenue Lost Due
To Price
Increase
100
50
0
100
200
300
400
500 600
Quantity Demanded

11. A Demand Curve of an Inelastic Good
Price
250
200
150
100
50
D
0
20
40
60
80
100 120
Quantity Demanded

12. A Demand Curve of an Inelastic Good
Price
250
200
150
100
50
D
50 x 60
0
20
40
60
80
100 120
Quantity Demanded

13. A Demand Curve of an Inelastic Good
Price
250
200
250 x 40
150
100
50
D
0
20
40
60
80
100 120
Quantity Demanded

14. A Demand Curve of an Inelastic Good
Price
250
200
150
100
Revenue
Gained
Due To
Price
Increase
50
Revenue Lost Due
To Price
Increase
D
0
20
40
60
80
100 120
Quantity Demanded

15. A Demand Curve of an Perfectly Inelastic
Good
Price
50
40
30
20
10
D
0
2
4
6
8
10
Quantity Demanded

16. A Demand Curve of an Perfectly Inelastic
Good
Price
50
40
30
20
10
D
0
2
4
6
8
10
Quantity Demanded

17. A Demand Curve of an Perfectly Inelastic
Good
Price
50
40
30
20
10
D
0
2
4
6
8
10
Quantity Demanded

18. A Demand Curve of an Perfectly Inelastic
Good
Price
50
Revenue Gained Due
To Price
Increase
40
30
20
10
D
0
2
4
6
8
10
Quantity Demanded

19. A Demand Curve of an Perfectly Elastic
Good
Price
1000
800
600
400
D
200
0
50
100
150
200
250
Quantity Demanded

20. A Demand Curve of an Perfectly Elastic
Good
Price
1000
800
600
400
200
0
D
400 x 250
50
100
150
200
250
Quantity Demanded

21. A Demand Curve of an Perfectly Elastic
Good
Price
1000
800
600
400
200
0
D
Revenue Lost Due
To Price
Increase
50
100
150
200
250
Quantity Demanded

22. A Demand Curve for a Good with Unitary
Price Elasticity
Price
y
x
D
0
z
w
Quantity Demanded

23. A Demand Curve for a Good with Unitary
Price Elasticity
Price
y
Revenue
Gained
Due To
Price
Increase
x
D
Revenue Lost Due To Price Increase
0
z
w
Quantity Demanded

24. Summing Up
Elastic Goods
• Percentage change in Demand is greater than
percentage change in price.
• Highly responsive to price change
• Increases in price will lead to fall in total revenue.
Inelastic Goods
• Percentage change in Demand is Less than percentage
change in price.
• Slightly responsive to price change (BUT STILL
RESPONSIVE!)
• Increases in price will lead to a raise in total revenue.

25. Straight Line Elasticity
Price
250
200
A = Perfectly Elastic
150
C = Unitary Elasticity
100
50
B = Perfectly Inelastic
0
100
200
300
400
500 600
Quantity Demanded

26. Straight Line Elasticity
Price
Percentage Change in Demand
∞
Percentage Change in Price
250
=
=
x
=
∞
PED
200
Perfectly Elastic!
150
100
50
D
0
100
200
300
400
500 600
Quantity Demanded

27. Straight Line Elasticity
Price
Percentage Change in Demand
8
=
y
Percentage Change in Price
10
=
∞
=
0
PED
Perfectly Inelastic!
6
4
3
2
D
0
2
4
6
7
8
10
Quantity Demanded

28. Straight Line Elasticity
Price
10
Percentage Change in Demand
8
Difference
Original
7
1
1
6
=
x 100
x 100 = 100%
4
2
D
0
1
2
4
6
8
10
Quantity Demanded

29. Straight Line Elasticity
Price
10
Percentage Change in Price =
8
Difference
Original
7
1
7
6
x 100
x 100 = (-) 14%
4
2
D
0
1
2
4
6
8
10
Quantity Demanded

30. Straight Line Elasticity
Price
10
Percentage Change in Demand
100%
Percentage Change in Price
8
=
=
(-)14%
=
(-) 7.1
PED
7
Elastic!
6
4
2
D
0
1
2
4
6
8
10
Quantity Demanded

31. Straight Line Elasticity
Price
Percentage Change in Demand
10
Difference
Original
8
1
5
x 100
x 100 = 20%
6
5
4
2
D
0
2
4
5
6
8
10
Quantity Demanded

32. Straight Line Elasticity
Price
Percentage Change in Price
10
Difference
Original
8
1
5
x 100
x 100 = 20%
6
5
4
2
D
0
2
4
5
6
8
10
Quantity Demanded

33. Straight Line Elasticity
Price
Percentage Change in Demand
Percentage Change in Price
10
=20%
=(-)20%
PED
8
=(-) 1
Unitary Elasticity!
6
5
4
2
D
0
2
4
5
6
8
10
Quantity Demanded

34. Straight Line Elasticity
Price
Percentage Change in Demand
10
8
Difference
Original
6
1
7
x 100
x 100 = 14%
4
3
2
D
0
2
4
6
7
8
10
Quantity Demanded

35. Straight Line Elasticity
Price
10
Percentage Change in Price
8
Difference
Original
6
1
3
x 100
x 100 = 33%
4
3
2
D
0
2
4
6
7
8
10
Quantity Demanded

36. Straight Line Elasticity
Price
Percentage Change in Demand
=14%
Percentage Change in Price
10
=(-)33%
8
PED
=(-) 0.42
Inelastic!
6
4
3
2
D
0
2
4
6
7
8
10
Quantity Demanded