The law of demand says:
An increase in price causes a decrease in
quantity demanded (and vice-versa)
 But how much does quantity demanded
change in response to a change in price?
 Elasticity gives us a measure of
responsiveness


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Chapter 4, LO1
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

When QD responds strongly to a change in P,
demand is elastic
When QD responds weakly to a change in P,
demand is inelastic
Ed = percentage change in quantity demanded of product X
percentage change in price of product X
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Chapter 4, LO1
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 If the quantity demanded increased from 4 to 5 units
the percentage change would be:
 %ΔQd = ΔQd/Q0 = ¼ x 100 = 25%
 If the quantity demanded dropped from 5 to 4, the
percentage change would be:
 %ΔQ = ΔQd/Q0 = 1/5 x 100 = 20%
 Which percentage change in Qd do we use? 25% or
20%?
 To avoid confusion about start and end point we use
average change in Qd and the average change in P.
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Chapter 4, LO1
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change in quantity change in price
Ed 

100
sum of quantities/ 2 sum of prices/ 2
If the quantity demanded increased from 4 to 5
units the percentage change would be:
Q
P
1
1
Ed 



1
(Q0  Q1 ) / 2 ( P0  P1 ) / 2 (4  5) / 2 (4  5) / 2
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Chapter 4, LO1
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
Price elasticity of demand:
 Use percentages
▪ Unit free measure
▪ Compare responsiveness across products
 Eliminate the minus sign
▪ Easier to compare elasticities
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Chapter 4, LO1
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



Ed > 1 demand is elastic
Ed = 1 demand is unit elastic
Ed < 1 demand is inelastic
Extreme cases
 Perfectly inelastic
 Perfectly elastic
LO1
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Chapter 4, LO1
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P
D1
Perfectly
inelastic
demand
(Ed = 0)
0
Perfectly inelastic demand
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Chapter 4, LO1
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P
D2
Perfectly elastic
demand
(Ed = ∞)
0
Perfectly elastic demand
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Chapter 4, LO1
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