Price Elasticity of Demand
 Elasticity of Demand describes the percentage
change in quantity demanded that follows a
price change.
Elasticity of Demand
 Demand is Elastic
Change in Price
Large Change in Qd
 Demand is Inelastic
Change in Price
Small/No Change in Qd
Example: Dentist Visits
 If the price increases, how much change will there
be in the Quantity Demanded? Elastic or Inelastic?
Example: Sailboats
Elastic or Inelastic?
Key Factor - Preferences
 Decides whether something is a necessity or a luxury.
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 Make a list of goods and services and divide them up
into the two categories of Elastic and Inelastic demand.
…Can you come up with any more broader
categories…such as Necessities (vs) Luxuries?
Determinants of Elasticity
 Necessities (vs) Luxuries

Necessities tend to have inelastic demand and luxuries tend to have elastic demand
 Substitution possibilities

Price elasticity of demand will be relatively high if it is easy to substitute between
products
 Budget Share

Items that take up a larger share of the budget tend to have higher price elasticities of
demand
 Time

Because substitution often takes time, price elasticity will usually be higher in the long
run than in the short run
 Durability of Goods

Computers, cars, washers, and dryers will be in greater demand if the price drops.
 Drugs

Legal (heart medicine antibiotics) or illegal (heroin, cocaine)
Calculating Elasticity of
Demand
 Price elasticity of demand is defined as:
 the percentage change in the quantity of a good
demanded resulting from a one-percent change in its
price
 = % change in quantity demanded / % change in price
 = (ΔQ/Q)/(ΔP/P)
 Price Elasticity = (P/Q)*(1/slope)
Equation for a Straight Line Demand Curve




P is for the price of the good
Q is for the quantity demanded
b is the vertical intercept
m represents the slope
P  b  mQ
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-8
Copyright © 2005 McGraw-Hill Ryerson Limited
FIGURE 4.6
The Market Demand Curve for Canned Tuna
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-9
Copyright © 2005 McGraw-Hill Ryerson Limited
FIGURE 4.12
Graphical Interpretation of Price Elasticity of Demand
Price elasticity of demand at any point along a straight-line demand curve is the ratio of price to
quantity at that point times the reciprocal of the slope of the demand curve.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-10
Copyright © 2005 McGraw-Hill Ryerson Limited
FIGURE 4.11
Elastic and Inelastic Demand
Three Cases!
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-11
Copyright © 2005 McGraw-Hill Ryerson Limited
Examples.
 1) Find slope given price, quantity and y-intercept.
 Then calculate price elasticity of demand.
 Determine unit elastic, elastic, inelastic?
2) Using a graph, be able to do the same thing.
Special Cases.
 Perfectly Elastic demand
 Price elasticity of demand
is infinite
 (ΔQ/Q)/(ΔP/P) =
∞
 Slightest change in price
leads consumers to find
substitutes.
 Horizontal demand curve
 Ex: - Foreign currency
market
 Perfectly Inelastic demand
 Price elasticity of demand
is zero
 (ΔQ/Q)/(ΔP/P) = 0
 Consumers do not switch to
substitutes even when price
increases dramatically
 Vertical demand curve
 Ex: - Diabetic (insulin)
- Addict (heroin)
FIGURE 4.14
Perfectly Elastic, Perfectly Inelastic, and Unit Elastic Demand Curves
Demand Curves The horizontal demand curve in panel (a) is perfectly elastic, or infinitely elastic, at
every point. Even the slightest increase in price leads consumers to desert the product in favour of
substitutes. The vertical demand curve in panel (b) is perfectly inelastic at every point. Consumers do
not, or cannot, switch to substitutes even in the face of large increases in price. The demand curve in
panel (c) represents a case of unit elastic demand. Regardless of the price selected, total expenditure
is unchanged. In this example, total expenditure is $28 no matter what price is selected.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-14
Copyright © 2005 McGraw-Hill Ryerson Limited
Elasticity of Supply
 Can be elastic or inelastic depending on the product
and circumstances.
 “responsiveness of producers to price changes in
their products”
 Key Factors
 Time
 Inelastic – short run, elastic – long run
 Perishability
 Goods stored easily – More elastic
Ex: Raspberries (Perish very quickly)…no matter what the
price, suppliers will not want to carry large amounts.
Practice!!!
 1) Determining whether things will have an inelastic
or elastic demand.
 2) Calculating price elasticity of demand.
 ...assignment!
Expenditure & Revenue
 Total Expenditure = Total Revenue
(Consumers)
(Producers)
Total Expenditure = (Number of Units bought) (Price) = TR
FIGURE 4.10
Total Expenditure as a Function of Price
For a good whose demand curve is a straight line, total expenditure reaches a maximum at the price
corresponding to the midpoint of the demand curve.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-18
Copyright © 2005 McGraw-Hill Ryerson Limited
FIGURE 4.7
The Demand Curve for Movie Tickets
An increase in price
from $2 to $4 per
ticket increases total
expenditure on tickets
Price ($/ticket)
12
10
8
6
4
2
0
D
1 2
3
4
5
6
Quantity (100s of tickets/day)
An increase in price from $2 to $4 per ticket increases total expenditure on tickets.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-19
Copyright © 2005 McGraw-Hill Ryerson Limited
Law of Demand & Total
Expenditures
 Many firms would like to know:
 “Will consumers spend more on my product (will I get
more revenue, in total) if I sell more units at a lower
price or fewer units at a higher price?”
 Answer depends on the price elasticity of demand
 When price rises, total expenditure may
 Increase
 Decrease
 Or stay the same
Price Elasticity and
Expenditures
 For a product whose demand is “price elastic”




Quantity demanded is highly responsive to price changes
Percentage change in quantity dominates
An increase in price will reduce total expenditure
A decrease in price will increase total expenditure
 For a product whose demand is “price inelastic”




Quantity demanded is not responsive to price changes
Percentage change in price dominates
An increase in price will increase total expenditure
A decrease in price will decrease total expenditure
Example
Tickets at a Blue Jays game.
Old Price
New Price
P
X
$ 40
X
33,781 =
$1,354,840
X
25,000
$ 1,250,000
$ 50
Demand is Elastic.
Q
=
Price results in
=
TR
TR
…The price resulted in a big change of attendance at the
game. (Obviously, there could be other factors as
well…different teams in town)
FIGURE 4.10
Total Expenditure as a Function of Price
Elastic side
Inelastic side
For a good whose demand curve is a straight line, total expenditure reaches a maximum at the price
corresponding to the midpoint of the demand curve.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-23
Copyright © 2005 McGraw-Hill Ryerson Limited
Elasticity of Demand – Important for
businesses to consider…
 What happens if a florist increases the price of roses
400 % in October ? Will sales go up or down ?
 A. Probably, down
 What happens if a florist increases the price of roses
on February 14th? Will sales go down or up?
 A. Probably up
- Why? Frantic husbands and boyfriends will pay
exorbitant prices for a dozen roses on Valentine’s Day –
if they know what’s good for them ! !
Practice!!!
 1) Calculating Total Revenue/Total Expenditures
using a graph.
 2) Given a change in price, calculate the change in
TR/TE, then determine whether the price elasticity of
demand is Elastic, Inelastic, or Unit Elastic.