Price Elasticity

1. Price Elasticity
of Demand
MS. LEA L. GARCIA, LPT

2. Objectives:
• explore the elasticity of demand
• solve problems on price elasticity of demand

3. Think!

4. Price Elasticity
• measures the responsiveness of the
quantity demanded or supplied of a good
to a change in its price.

5. Price Elasticity of Demand (PED)
• Price elasticity of demand is the
responsiveness of quantity demanded, or
how much quantity demanded changes,
given a change in the price of goods or
services.
• A device to measure the rate of change in
the quantity of a product demanded in
response to a small change in its price.

6. Types of Elasticity of Demand
Elastic Demand - %∆QD > %∆P
Inelastic Demand - %∆QD < %∆P
Unitary Demand - %∆QD = %∆P
Perfectly Elastic – |E| = ∞
Perfectly Inelastic - |E| = 0

7. 1. ELASTIC DEMAND
Elastic Demand - %∆QD > %∆P
When the percentage change in quantity
demanded is greater than the percentage change
in price, and the coefficient of the elasticity is
greater than 1.
PED > 1

8. 1. ELASTIC DEMAND
- Most products in elastic demand
a. have many substitutes/alternatives
b. may be unnecessary/ for luxury
Example:
If Kit Kats increase, people will switch to
alternative types of a chocolate bar.
If the price of Hermes bags goes up, people will
look for imitations or Class A bags.

9. 2. INELASTIC DEMAND
Inelastic Demand - %∆QD < %∆P
When the percentage change in quantity
demanded is less than the percentage change in
price, and the coefficient of the elasticity is less
than 1.
PED < 1

10. 2. INELASTIC DEMAND
Most products that are inelastic:
a. almost to no other substitutes/alternatives
b. primary needs/ essentials and needed
Example: For householders, tap water is a
necessity with no alternatives. If the water
company increase the cost of water bills, people
would keep buying the service.

11. 3. UNITARY ELASTIC DEMAND
Unitary Demand - %∆QD = %∆P
When the percentage change in demand is equal
to the percentage change in price, the product is
said to have Unitary Elastic demand.
PED = 1

12. 3. UNITARY ELASTIC DEMAND
Example: If a phone company sells
smartphones with unit elastic demand, a
10% price increase will lead to a 10%
decrease in the quantity demanded.
Thus, the company’s revenue will decline
by 10% as well.

13. 4. PERFECTLY ELASTIC DEMAND
Perfectly Elastic – |E| = ∞
a small percentage change in price brings about a
change in quantity demanded from zero to infinity.

14. 4. PERFECTLY ELASTIC DEMAND
Perfect elastic demand means that quantity
demanded will increase to infinity when the price
decreases, and quantity demanded will decrease
to zero when price increases. When consumers
are extremely sensitive to changes in price, you
can think about perfectly elastic demand as “all
or nothing.”

15. 4. PERFECTLY ELASTIC DEMAND
Example: For example, if the price of cruises to the
Caribbean decreased, everyone would buy tickets
(i.e., quantity demanded would increase to
infinity), and if the price of cruises to the
Caribbean increased, not a single person would be
on the boat (i.e., quantity demanded would
decrease to zero).

16. 5. PERFECTLY INELASTIC DEMAND
Perfectly Inelastic - |E| = 0
the PED is =0 any change in price will not have
any effect on the demand of the product.

17. 5. PERFECTLY INELASTIC DEMAND
Most products that are perfectly inelastic are
extremely important or necessary that
whatever its price, people will still buy it.
Example: life-saving prescription drugs

18. Price Elasticity of Demand (PED)
or in symbol :
Ed = %∆QD
%∆P

19. Price Elasticity of Demand (PED)
PED is always negative. To interpret it
clearly, we will use its absolute value.
|Ed = %∆QD |
| %∆P |

20. Price Elasticity of Demand (PED)
|Ed = %∆QD |
| %∆P |
where:
QD1 = old demand
QD2 = new demand

21. Price Elasticity of Demand (PED)
|Ed = %∆QD |
| %∆P |
where:
P1 = old price
P2 = new price

22. Let’s Try!
• Your mom often buys 25
kilos of rice every month
in the price of Php42.
Due to the calamities
that occurred recently,
the price goes up to
Php53. Now, your mom
decides to buy 20 kilos of
rice instead of 25.
QD1 = 25 P1= 42
QD2 = 20 P2 = 53

23. SOLUTION:
• Ed = %∆QD
%∆P
• Ed = -22.22
23.18
= - 0.96
= |- 0.96|
Ed = 0.96
WHAT TYPE OF
ELASTICITY OF DEMAND
IS BEING ILLUSTRATED?

24. SOLUTION:
• Ed = %∆QD
%∆P
• Ed = -22.22
23.18
= - 0.96
= |- 0.96|
Ed = 0.96
WHAT TYPE OF
ELASTICITY OF DEMAND
IS BEING ILLUSTRATED?
INELASTIC
DEMAND

25. TO BE CONTINUED…

26. HOW TO GET PED WHEN PERCENTAGE OF
DEMAND AND PRICE IS GIVEN?
∆QD – 4%
∆P – 9%
• |Ed = %∆QD |
| %∆P |
• 4%
9%
= 0.44
INELASTIC DEMAND

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