Price elasticity of demand (PED) shows the relationship between price and quantity demanded and provides a precise calculation of the effect of a change in price on quantity demanded.

1. Prepared by:
Prof. Ali Fallahchay

2. Learning Outcomes
• Price Elasticity of Demand and Types of Elasticity
• Calculating Elasticities: Arc, Point, Cross-price,
Income and Supply
• Elasticity and Total Revenue
• Determinants of Demand Elasticity

3. Price Elasticity
• Elasticity – measures the degree of responsiveness in
the quantity per unit of time to a change in any one of
the factors of demand or supply.
• Price Elasticity – measures the relative responsiveness
in quantity demanded to a change in price.
𝑒 𝑑 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑒 𝑑 = ∆𝑄 𝑄
∆𝑃 𝑃
= - Q2 – Q1 x P1
P2 – P1 Q1

4. Elastic Demand Diagram
𝑒 𝑑>1

5. Inelastic of demand
𝑒 𝑑<1

6. Unit-elastic or Unitary

7. Perfectly Elastic
𝑒 𝑑 = ∞

8. Perfectly inelastic
𝑒 𝑑 = 0

9. Question and Answer
Q1: At a price of Php11.00, quantity demanded is 90;
and at a price of Php9.00, quantity demanded is 110.
The price elasticity of demand is:
a. 0.1
b. -0.82
c. -1.22
d. -1
e. 0

10. Interpretation of Elasticity of Demand
• Ed > 1 demand is elastic
• Ed = 1 demand is unit elastic
• Ed < 1 demand is inelastic
• Extreme cases
• Perfectly inelastic
• Perfectly elastic
LO1

11. Arc Elasticity
𝑒 𝑝 =
𝑒 𝑝 = │(Q2 – Q1) x (P2 + P1)│
│(P2 - P1) (Q2 + Q1)│

12. Example 1:
Point Px Qx
A 16 0
B 14 2000
C 12 4000
D 10 6000
F 8 8000
G 6 10000
H 4 12000
L 3 14000
M 0 16000

13. Question and Answer
Q2:Find the 𝑒𝑝 for a movement from point B to point C
Q3:Find the 𝑒𝑝 for a movement from point C to point D

14. Total Revenue Test
• Total Revenue = Price X Quantity
• Inelastic demand
• P and TR move in the same direction
• Elastic demand
• P and TR move in opposite directions
LO2

15. Price Elasticity of demand and Total
RevenueP Q TR = P x Q
10 1 10
9 2 18
8 3 24
7 4 28
6 5 30
5 6 30
4 7 28
3 8 24
2 9 18
1 10 10
Example 2

16. Total Revenue Test
LO2
$3
2
1
0 10 20 30 40 Q
P
a
b
D1
• Lower price and elastic demand
• Blue gain exceeds orange loss

17. Total Revenue Test
LO2
$4
3
2
1
0 10 20 Q
P
c
d
D2
• Lower price and inelastic demand
• Orange loss exceeds blue gain

18. Total Revenue Test
LO2
$3
2
1
0 10 20 30 Q
P
e
f
D3
• Lower price and unit elastic demand
• Blue gain equals orange loss

19. Price Elasticity and Total RevenueELASTICITY IMPLICATIONS
Elastic As price decreases, quantity
demanded and total revenue
increases.
Inelastic As price decreases, quantity
demanded increases, but total
revenue decreases
Unitary As price decreases, the increase in
quantity demanded exactly offsets
it, and total revenue is constant

20. Cross Elasticity of Demand
• Measures responsiveness of sales to
change in the price of another good
• Substitutes – positive sign
• Complements – negative sign
• Independent goods - zero
LO4
Percentage change in quantity demanded of product X
Ex,y =
Percentage change in price of product Y

21. Cross Elasticity of Demand
• Application
• Change the price?
• Allow a merger?
LO4

22. Cross Elasticity
∆Qx Qx
∆Px Py
Qx2 −Qx1
Py2 −Py1
x
Py1
Qy1
Before After
Commodity P Q P Q
Product Y 80 600 60 800
Product X 40 400 40 300
Product Z 100 20 120 18
Product X 40 400 40 360
CROSS ELASTICITY OF DEMAND

23. ELASTICITY Category of
Goods
INTERPRETATION
Positive Substitute Goods are substitutes
for one another
Negative Complements Goods are consumed
together
Zero Independents Goods are not related
in consumption

24. Income Elasticity of Demand
• Measures responsiveness of buyers
to changes in income
• Normal goods – positive sign
• Inferior goods – negative sign
LO4
Percentage change
in quantity demanded
Ey =
Percentage change in income

25. Simplified formula
ey =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
ey =
Δ𝑄/𝑄
Δ𝑃/𝑃
ey = 𝑄2 − 𝑄1 x 𝑃1
𝑃2 − 𝑃1 𝑄1

26. ELASTICITYODS CATEGORY
OF GOODS
INTERPRETATION
Positive Superior Consumption of the
good varies directly
with income
Negative Inferior Consumption of the
good varies
inversely with
income
Zero Independent Consumption of the
good does not vary
with income

27. Price Elasticity of Supply
• Measures sellers’ responsiveness to
price changes
• Elastic supply, producers are
responsive to price changes
• Inelastic supply, producers are not
responsive to price changes
LO3

28. Price Elasticity of Supply
• Formula to compute elasticity
• Es > 1 supply is elastic
• Es < 1 supply is inelastic
LO3
Percentage Change in Quantity
Supplied of Product X
Percentage Change in Price
of Product X
Es =

29. Price Elasticity of Supply
• Time is primary determinant of
elasticity of supply
• Time periods considered
• Market period
• Short Run
• Long Run
LO3

30. Elasticity of Supply: The Market Period
LO3
P
Q
• Perfectly inelastic supply
D1
D2
Sm
Q0
Pm
P0

31. Elasticity of Supply: The Short Run
LO3
• Supply is more elastic than in market
period
P
Q
D1
D2
Ss
Q0
Ps
P0
Qs

32. Elasticity of Supply: The Long Run
LO3
• Supply is even more elastic than in
the short run
P
Q
D1
D2
Sl
Q0
Pl
P0
Ql

33. Applications of Elasticity of Supply
• Antiques
Inelastic supply
• Reproductions
More elastic supply
• Volatile gold prices
Inelastic supply
LO3