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Elasticity
“Elasticity is a measure of the extent to which a
quantity responds to a change in a variable.”
Price Elasticity of Demand
Elastic Inelastic
Percentage change in
Demand will be
Greater than change in price.
Percentage change inprice will be
Greater than change in demand.
“The responsiveness of Demand to a change in
price.”
Price Elastic Goods
• Very responsive to Price changes
• Many Substitutes (undifferentiated)
• Products widely available
Price Inelastic Goods
• Less responsive to Price changes
• *** Inelastic goods are still affected by price rises! ***
• Inelastic goods tend to be…– Highly branded (highly fashionable) – Innovative – In short supply– Few Substitutes – Habit Forming
Calculating P.E.D.
P.E.D. = Percentage change in Demand
Percentage change in Price
% Change = Difference x 100 = _____ % Original
Calculating P.E.D.
Value Description Explanation• 0 Perfectly Inelastic Price has no effect on
demand at all
• 0<1 Inelastic Price has a small effect on demand
• 1 Unitary Changes are the same
• 1<Infinity Elastic Demand is very sensitive to price
• Infinity Perfectly Any Increase in price, kill Elastic demand
A Demand Curve of an Elastic GoodPrice
Quantity Demanded
0
D
250
200
150
100
50
500400300200100 600
Total Revenue at 150THB Price
Quantity Demanded
0
D
250
200
150
100
50
500400300200100 600
600 x 150
Total Revenue at 200THBPrice
Quantity Demanded
0
D
250
200
150
100
50
500400300200100 600
200 x 100
A Demand Curve of an Elastic GoodPrice
Quantity Demanded
0
D
250
200
150
100
50
500400300200100 600
Revenue Lost Due To Price Increase
Revenue Gained Due To Price
Increase
A Demand Curve of an Inelastic GoodPrice
Quantity Demanded
0
D
250
200
150
100
50
10080604020 120
A Demand Curve of an Inelastic GoodPrice
Quantity Demanded
0
D
250
200
150
100
50
10080604020 120
50 x 60
A Demand Curve of an Inelastic GoodPrice
Quantity Demanded
0
D
250
200
150
100
50
10080604020 120
250 x 40
A Demand Curve of an Inelastic GoodPrice
Quantity Demanded
0
D
250
200
150
100
50
10080604020 120
Revenue Gained Due To Price
Increase
Revenue Lost Due To Price Increase
A Demand Curve of an Perfectly Inelastic Good
Price
Quantity Demanded
0
D
50
40
30
20
10
108642
A Demand Curve of an Perfectly Inelastic Good
Price
Quantity Demanded
0
D
50
40
30
20
10
108642
A Demand Curve of an Perfectly Inelastic Good
Price
Quantity Demanded
0
D
50
40
30
20
10
108642
A Demand Curve of an Perfectly Inelastic Good
Price
Quantity Demanded
0
D
50
40
30
20
10
108642
Revenue Gained Due To Price
Increase
A Demand Curve of an Perfectly Elastic Good
Price
Quantity Demanded
0
D
1000
800
600
400
200
25020015010050
A Demand Curve of an Perfectly Elastic Good
Price
Quantity Demanded
0
D
1000
800
600
400
200
25020015010050
400 x 250
A Demand Curve of an Perfectly Elastic Good
Price
Quantity Demanded
0
D
1000
800
600
400
200
25020015010050
Revenue Lost Due To Price Increase
A Demand Curve for a Good with Unitary Price Elasticity
Price
Quantity Demanded
0
D
y
x
z w
A Demand Curve for a Good with Unitary Price Elasticity
Price
Quantity Demanded
0
D
y
x
z w
Revenue Lost Due To Price Increase
Revenue
Gained Due To Price
Increase
Summing Up
Elastic Goods • Percentage change in Demand is greater than
percentage change in price.• Highly responsive to price change • Increases in price will lead to fall in total revenue.
Inelastic Goods • Percentage change in Demand is Less than
percentage change in price.• Slightly responsive to price change (BUT STILL
RESPONSIVE!) • Increases in price will lead to a raise in total
revenue.
Straight Line Elasticity Price
Quantity Demanded
0
250
200
150
100
50
500400300200100 600
A = Perfectly Elastic
B = Perfectly Inelastic
C = Unitary Elasticity
Straight Line Elasticity Price
Quantity Demanded
0
D
250
200
150
100
50
500400300200100 600
Percentage Change in Demand= ∞
Percentage Change in Price = x
PED = ∞
Perfectly Elastic!
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 7 10
3
Percentage Change in Demand= y
Percentage Change in Price = ∞
PED = 0
Perfectly Inelastic!
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
86421 10
Percentage Change in Demand = Difference x 100
Original
1 x 100 = 100%1
7
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
86421 10
Percentage Change in Price = Difference x 100
Original
1 x 100 = (-) 14%7
7
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
86421 10
Percentage Change in Demand =100%
Percentage Change in Price = (-)14%
PED = (-) 7.1
Elastic!
7
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 5 10
5
Percentage Change in Demand
Difference x 100 Original
1 x 100 = 20%5
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 5 10
5
Percentage Change in Price
Difference x 100 Original
1 x 100 = 20%5
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 5 10
5
Percentage Change in Demand=20%
Percentage Change in Price=(-)20%
PED =(-) 1
Unitary Elasticity!
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 7 10
3
Percentage Change in Demand Difference x 100
Original
1 x 100 = 14%7
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 7 10
3
Percentage Change in Price Difference x 100
Original
1 x 100 = 33%3
Straight Line Elasticity Price
Quantity Demanded
0
D
10
8
6
4
2
8642 7 10
3
Percentage Change in Demand=14%
Percentage Change in Price =(-)33%
PED =(-) 0.42
Inelastic!
