Price Elasticity of Demand
P
INELASTIC DEMAND: a
change in the price will lead
to a relatively small decrease
in quantity demanded
Demand
Q
Price Elasticity of Demand
P
ELASTIC DEMAND:
a change in the price will
lead to a relatively large
decrease in quantity
demanded
Demand
Q
Price Elasticity of Demand
• The elasticity of demand refers to the extent to which
demand changes as prices change.
• The precise definition for PED is:
• The responsiveness of demand to a change in price
• The formula for Price Elasticity of Demand is:
Ped =
% change in quantity demanded
% change in price
% change in quantity demanded =
% change in price =
difference
original
difference
original
Price Elasticity of Demand
• The formula for Price Elasticity of Demand:
Ped =
% change in quantity demanded
% change in price
PED = 0 = Perfectly Inelastic
PED < 1 = Inelastic
PED = 1 = Unitary
PED > 1 = Elastic
PED = infinity = Perfectly Elastic
PED: Example
Mexico:
Mexicans are the world’s largest per capita consumer
of coca cola. The company have decided to
increase the price of a litre bottle from $1.25 to $1.50.
The demand for coca cola that month in Monterrey
dropped from 160,000 litres to 145,000 litres. Calculate
the Price Elasticity of Demand.
Answer: 0.094/0.2 =
0.47 PED = INELASTIC
PED: Example 2
• United States:
• The United States economy is
currently in a deep recession.
This has forced manufacturers
of Smith and Wesson luxury
guns to reduce their price for a
handheld magnum .357 from
$1750 to $1289. They have
experienced an increase in
sales in Texas from 3200 units
per month to 5000 units.
Calculate the Elasticity of
Demand.
1800/3200 % 461/1750
(.563)
% (.263)
= 2.14 PRICE
ELASTIC
PED: Example 3
• Malaysia:
• Due to a poor harvest the price of Maggi’s
noodles in Johor Bahru has increased from 1.5
MYR to 2.0 MYR. The quantity demanded has
fallen from 50,000 packets per week to 47,000
packets. What is the price elasticity of
demand?
3000 / 50000= 0.06
.5/1.5
= 0.333
0.18 Price Inelastic
PED Example 4
• Singapore:
• Luxury watch brand Rolex have increased prices
in Singapore after intense marketing at the Grand
Prix.The average price for a men’s watch has
increased from $2000 to $2200. This has been
accompanied by a fall in sales of 23% this month.
Calculate the price elasticity of demand.
0.23
200/2000 =
0.1
PED Example 5
• Great Britain:
• British airways have decided to reduce the
price of their flights from London to Dubai to
from $770 to $720. This has increased daily
passenger numbers from 600 to 680 per day
as flyers move from other airlines. Calculate
the PED.
80/600 = 0.133
50/750 = 0.065
Price elastic 2.05
PED Example 6
• Greece:
• Sales of soap in Greece have fallen by 8% this
year in the financial crisis. This has been
accompanied by a 15% increase in the price.
Calculate the PED.
QD = .08
P = .15
Price inelastic 0.53
Elasticity and Total Revenue
• Calculate the new and old total
revenues for each example.
• What is the relationship between
elasticity and total revenue?
When the PED is elastic: An increase in
price reduces TR
When PED is inelastic: An increase in price
increases TR.