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

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 1

When QD responds strongly to a change in P, demand is elastic

When QD responds weakly to a change in P, demand is inelastic

percentage change in quantity demanded of product X percentage change in price of product X

Ed =

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 2

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.

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 3

10022

ces/sum of pri

pricechange in

ntities/sum of qua

quantity change inEd

12/)54(

1

2/)54(

1

2/)(2/)( 1010

PP

P

QQ

QEd

If the quantity demanded increased from 4 to 5 units the percentage change would be:

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 4

Price elasticity of demand: Use percentages

▪ Unit free measure▪ Compare responsiveness across

products Eliminate the minus sign

▪ Easier to compare elasticities

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 5

LO1

Ed > 1 demand is elastic Ed = 1 demand is unit elastic Ed < 1 demand is inelastic Extreme cases

Perfectly inelastic Perfectly elastic

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 6

D1P

Perfectly inelastic demand

Perfectly inelastic demand(Ed = 0)

0

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 7

Perfectly elastic demand

P

D2

Perfectly elasticdemand(Ed = ∞)

0

© 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 8