Elasticity

1. ELASTICITY

2. Price elasticity of demand
0
2
4
6
8
10
12
14
10 20 30 40 50 60
price $
quantity
D
Expansion in demand

3. Price elasticity of demand
0
2
4
6
8
10
12
14
10 20 30 40 50 60
price $
quantity
D
Demand response is greater
than the initial price change.
The PED is ELASTIC.

4. Calculation - point method
PED = %Qd ÷ %P
%Qd = [(Q2 - Q1) ÷ Q1] x 100
= [(30 - 20) ÷ 20] x 100
= (10 ÷ 20) x 100
= 0.5 x 100
= 50%  in quantity demanded
%P = [(P2 - P1) ÷ P1] x 100
= [(8 - 10) ÷ 10] x 100
= (2* ÷ 10) x 100
= 0.2 x 100
= 20%  in price
(* Ignore negative sign. This simply tells us
price has fallen.)
PED = 50 ÷ 20 = 2.5

5. Calculation - practice
PED = %Qd ÷ %P
Price $ Quantity D PED (2dp) =
100 2000
90 2500
70 3700
40 6000
2.50
2.18
1.44

6. Illustration - practice
1. Construct a demand line diagram that shows a price
INELASTIC response to a price reduction.
2. Construct a demand line diagram that shows a UNIT
PRICE ELASTIC response to a price reduction.

7. Calculation - total revenue method
An entrepreneur's total revenue is determined by how
many units of the product are sold at a particular price.
TR = P x Q
If p and TR then , PED is INELASTIC
If p and TR then , PED is ELASTIC
What happens if the PED is Unit elastic?

8. Calculation - practice
TR = P x Q
Price $ Quantity Sold TR PED is
100 2000
90 2500
80 2812
70 3100
$200 000 -
$225 000 Elastic
$224 960 Unit elastic
$217 000 Inelastic
What happens to the PED when prices rise?

9. Factors causing PED to change
• At a particular time
- Availability of similar priced substitutes
- Necessity of the product
- Size of income constraint
• Passing of time
- Substitutes can emerge or become known
- New technology  new products (ie mobile phones)
- Buyer preferences change/Income changes
- Speculation about future events