Understanding Economics
2nd edition
by Mark Lovewell and Khoa Nguyen
Chapter 3
Competitive Dynamics and Government
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Elastic and Inelastic Demand (a)
Price elasticity of demand shows how
responsive consumers are to price
changes
= % change in quantity demanded
% change in price
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
• elastic demand means % change in
quantity demanded is more than %
change in price; in other words a small
change in price can cause a great change
in quantity demanded
Example
If I increase the price of product A, the
quantity demanded is going to go
down significantly
OR
If I decrease the price of product A,
the quantity demanded is going to up
significantly
Can you think of possible situations
where either scenario would occur?
Elastic and Inelastic Demand (a)
inelastic demand means % change in
quantity demanded is less than %
change in price. In other words, a
change in price will only affect the
quantity by a small degree.
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Example
The increase or decrease of the price
for a product is not going to affect the
quantity demanded by very much
Can you think of possible situations
where this scenario would occur?
Elastic and Inelastic Demand (a)
unit-elastic demand means % change
in quantity demand equals % change in
price. A change in price will affect the
quantity demanded by the same
degree
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Elastic and Inelastic Demand
Example:
 During the winter, the vendor raises her price
by 20%, from $2->$2.40, causing a 50%
decrease in quantity demanded (from 1000
cones to 500 cones) ELASTIC
 During the summer, the vendor raises her
price by 20%, from $2->$2.40, causing a
10% decrease in quantity demanded (from
1000 cones to 900 cones) INELASTIC
Calculating Price Elasticity of
Demand
A numerical value for price elasticity of
demand (ed) is found by taking the
ratio of the changes in quantity
demanded and in price, each divided
by its average value.
In mathematical terms:
ed = ΔQd ÷ average Qd
Δprice ÷ average price
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Elasticity > 1 = Elastic
Elasticity < 1 = Inelastic
Elasticity = 1 = Unit elastic
Determinants of the Price Elasticity
of Demand
There are four determinants:
 necessities versus luxuries (more inelastic
for necessities and more elastic for
luxuries)
 Availability of substitutes (products with
more substitutes more elastic)
 portion of consumer incomes (products
with smaller portions more inelastic)
 time (more elastic with the passage of
time)
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Elastic and Inelastic Demand (b)
Figure 3.1 Page 56
Inelastic Demand Curve
for Ice cream Cones
2.40
2.40
20%
2.00
D1
1.60
50%
1.20
0.80
0.40
0
500
Quantity Demanded
(cones)
1000
Price ($ per cone)
Price ($ per cone)
Elastic Demand Curve
for Ice Cream Cones
20%
2.00
D2
1.60
10%
1.20
0.80
0.40
0
500
1000
Quantity Demanded
(cones)
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.