1. Kno-how! on price elasticity of
demand
Students should be able:
Define, measure and interpret
price elasticity of demand

2. Elasticity
Background Reading:
Phillip Allan
Nutter
p.?
p.?

3. Elasticity – The concept
The responsiveness of one variable
to changes in another

4. Price Elasticity of Demand
If price rises by 10% - what happens to
quantity demand?
We know quantity demanded will
contract
By more than 10%?
By less than 10%?
Or exactly 10%?
Elasticity measures the extent to which
demand will change.

5. Price Elasticity of Demand
The responsiveness of demand to a
small change in price
Where % change in demand is greater
than % change in price – elastic
Where % change in demand is less
than % change in price - inelastic

6. Price Elasticity of Demand
The formula:
PED =
% Change in Quantity Demanded
___________________________
% Change in Price
Note: PED has – sign in front of it; because as price rises
demand falls and vice-versa (inverse relationship between
price and demand)

7. Price Elasticity of Demand
Alternative formula:
PED =
D QD
DP
*
P1
Q1

8. Different demand curves
Price (£)
Quantity Demanded

9. Inelastic demand
Price (£)
Producer decides to lower price to attract sales
% Δ Price = -50%
10
% Δ Quantity Demanded = +20%
PED = -0.4 (Inelastic)
Total Revenue would fall
5
Not a good move!
D
56
Quantity Demanded

10. Elastic demand
Price (£)
Producer decides to reduce price to increase sales
% Δ in Price = - 30%
% Δ in Demand = + 300%
Ped = - 10 (Elastic)
Total Revenue rises
10
Good Move!
7
D
5
Quantity Demanded
20

11. Price elasticity
If demand is price
elastic
PED will be between
-1 and infinity
Increasing price
would reduce Total
Revenue (%Δ Qd > %
Δ P)
Reducing price would
increase TR
(%Δ Qd > % Δ P)
If demand is price
inelastic:
PED will be between
0 and -1
Increasing price
would increase Total
Revenue
(%Δ Qd < % Δ P)
Reducing price would
reduce TR (%Δ Qd <
% Δ P)

12. Price Elasticity of Demand and
Consumer Expenditure
Special cases

13. P
Perfectly inelastic demand (PD = –0)
D
P2
b
P1
a
O
Q1
Q

14. P
Perfectly elastic demand (PD = –)
a
b
D
P1
O
Q1
Q2
Q

15. P
20
Unit elastic demand (PD = –1)
a
b
8
D
O
40
100
Q

16. Price Elasticity of Demand and
Consumer Expenditure
Special cases =
PED = 0 (perfectly inelastic)
PED =  (perfectly elastic)
PED = –1 (unitary)

17. Elasticity
Value
Perfectly
Elastic
Diagram
Meaning
Increased Price will
lead to...
Possible
Examples
∞
Demand infinite at a given
price. Demand 0 at any
other price
Total Revenue falls to
zero.
Theoretical
special cases
Elastic
1<∞
% change in qty demanded
is greater than % change in
price
A fall in total revenue.
SUV’s, 5 star
hotels, flat
screen TV’s
Unitary
1
% change in demand equal
to % change in price
Total revenue remains
unchanged.
Special cases,
potenital any
good?
Inelastic
0<1
% change in qty demanded
is less than % change in
price.
A rise in total revenue.
Petrol,
cigarettes, rice.
Perfectly
Inelastic
0
No change in demand when
price changes
A rise in total revenue.
Highly addictive
goods.

19. Determinants of price
elasticity of demand
Number and closeness of substitutes – the
greater the number of substitutes the more
elastic
NOT anything else. Goods which might appear to
be inelastic for other reasons such as small
proportion of income but even these would not
be if they had substitutes.
Only determinant of PED is
SUBSTITUTABILITY

20. Importance of price
elasticity of demand
Relationship between changes in
price and total revenue
Importance in determining what
goods to tax (tax revenue)
Importance in analysing time lags
in production
Influences the behaviour of a firm