Elasticity of
demand
Elasticity of demand
 What
elasticity measures?
 How the price elasticity formula is applied
to measure the elasticity of demand?
 The difference between elastic, inelastic
and unitary elastic demand?
 How total revenue varies in each of these
tree cases?
 The meaning of perfect elasticity and
perfect inellasticity
Price elasticity of demand
 is
a measure of the sensitivity of quantity
demanded to chages in the price of a
product
 When quantity demanded is relatively
sensitive (insensitive) to a price change
demand is said to be elastic (inelastic)
Degree of elasticity
The exact degree of elasticity can be measured
by using a formula to compute the
elasticity coefficient:
EC 
where:


D
P
D – percentage change in demand: (yt-yt-1)/yt-1
P – percentage change in prices: (xt-xt-1)/xt-1
How to estimate price
elasticity
P - price
D - demand
∆P
∆D
Ep
2,5
80
5
60
100%
-25%
-0,25
7,5
40
50%
-33%
-0,67
10
20
33%
-50%
-1,50
It is important to note that the elasticity of demand is not the same
at all prices and that demand is typically elastic at higher and
inelastic at lower prices
Elastic, inelastic and unit
elastic demand
Demand is elastic (inelastic, unit elastic)
when the percentage change in quantity is
greater then (less then, equal to) the
percentage change in price and the
elasticity coefficient is greater than (less
than, equal to) 1
The sign of elasticity coeficient
Because price and quantity demanded are
inversely related to each other the price
elasticity of demand coefficient is a
negative number – but economists ignore
the minus sign in front of the coefficient and
focus their attention on its absolute value
The price elasticity of demand
for a product depends upon



the number of good subsitutes the
product has
its relative importance in the consumer’s
budget
whether it is a necessity or luxury
Relation between price
elasticity and revenue
The way in which total revenue changes
(increases, decreases, or remains constant) when
price changes is a test of the elasticity of demand
for a product



For elastic demand Ep (- ∞ ;-1): when price decreases
(increases) then revenues increases (decreases)
For inelastic demand Ep (- 1 ; 0): when price decreases
(increases) then revenues decreases (increases)
For unit elastic demand Ep=-1: the revenues are maximum
The example of the
previous rule
P – price
in £
D-demand
in tho.of units
∆P
∆D
Ep
Revenues
in tho. of £
2,50
80
-100%
25%
-0,25
200
5,00
60
-10%
7%
-0,67
300
5,50
56
-9%
7%
-0,79
308
6,00
52
-4%
4%
-0,92
312
6,25
50
-12%
12%
-1,00
312,5
7,00
44
-7%
9%
-1,27
308
7,50
40
-33%
50%
-1,50
300
10,00
20
Fill-in questions 1
 To
find out that the demand is elastic you
must know (price elasticity of demand,
income elasticity of demand)……………...
Fill-in questions 2
 If
a relatively large change in price results
in a relatively small change in demand,
demand is (elastic/ineclastic/perfect
eleasit)…………………………….
 If a relatively small change in price results
in a relatively large change in demand,
demand is (elastic/ineclastic/perfect
eleastic)…………………………..
Fill-in questions 3
 If
a change in price causes no change in
demand, demand is perfectly (elastic,
inelastic)…………………...and the demand
curve is (perpendicular to any axis, slopes
down in the rights)…………………
 If an extremely small change in price
results in an extremely large change in
demand, demand is (perfectly
elastic/perfectly inelastic)
Fill-in questions 4
If the price of a commodity declines
 when demand is inelastic the loss of revenue due
to the lower price is (greater than, less then, equal
to) …………………….the gain in revenue due to
the greater quantity demanded
 when demand is elastic the loss of revenue due to
the lower price is (greater than, less then, equal to)
…………………….the gain in revenue due to the
greater quantity demanded
 when demand is inelastic the loss of revenue due
to the lower price is (greater than, less then, equal
to) …………………….the gain in revenue due to
the greater quantity demanded
Fill-in questions 5
 If
demand is elastic, price and total
revenue are (directly, inversely) …….……
related
 If demand is inelastic, price and total
revenue are (directly, inversely) …….……
related
Fill-in questions 6
Complete the summary table below
If demand is:
Elastic
Inelastic
Of unitary
elasticity
The elasticity
coefficient is
If price rises, total
revenue will
If price falls, total
revenue will
Fill-in questions 6
Which of below determinants are not the
determinants of the elasticity of demand:
1. The number of good substitute products
2. The relative importance of the product
in the total budged of the buyer
3. Whether the good is a necessity or a
luxury
Fill-in questions 7
If the demand schedules for a certain
product are those given in the table,
answer the following questions.
Price in $
Demand in units
10
12
9
13
8
14
7
15
6
16
5
17
4
18
• What is price elasticity of demand for price P=6$...........................
• If we reduct price to 5$, revenus will (decrease/increase)………
• What is the „best” price for this product……………………………..