Ch8 - price elasticity of demand

• Price elasticity of demand

  The responsiveness of demand to a change in price
• Formula for price elasticity of demand

  Percentage change in quantity demanded/Percentage change in price
• Inelastic demand (price inelastic)

  • Change in price results in a proportionately smaller change in the quantity demanded (i.e. less responsive to a price change)
  • Example: Electricity
• Elastic demand (price elastic)

  • Change in price result in a greater change in the quantity demanded (i.e. more responsive to a price change)
• Inelastic demand

  If the value of PED is less than 1, the demand is said to be inelastic
• Inelastic demand


  • Steep demand curve
• Elastic demand

  If the value of PED is greater than 1, demand is said to be elastic
• Elastic demand

  • Flatter demand curve
• Perfectly inelastic demand

  • If the value of PED is zero, demand is said to be perfectly inelastic
  • Vertical demand curve, a price change will not affect the quantity demanded
• Perfectly elastic demand

  • If PED is equal to infinity, demand is said to be perfectly elastic
  • Horizontal demand curve, buyers purchase as much as possible can at price p1. However, if the price rises above P1,the quantity demanded will fall to zero
• Unitary elasticity

  If PED is exactly -1, demand is said to have unitary elasticity
• Unitary elasticity

  • The demand curve for a product that has unitary elasticity is called a rectangular hyperbola
  • A price change will result in no change in total revenue
• Factors affecting elasticity of demand (ANTI)

  • Availability of substitutes
  • Degree of necessity
  • Time
  • Percentage of income spent on goods or service
• Goods with many substitutes

  • Have elastic demand because consumers can switch easily from one product to another
• Goods with few or no real substitutes

  • Have inelastic demand
• Necessities

  • Have inelastic demand because consumers cannot reduce the amount they purchase significantly if prices rise
• Non-essential goods (e.g. luxury products)

  • Have elastic demand
• Short term

  • Goods have inelastic demand
• Long term

  • Goods have more elastic demand because consumers have more time to make decisions and find alternatives
• Goods/services that consumers spend a large proportion of income on

  • Have elastic demand
• Goods/services that cost very little in relation to income

  • Have inelastic demand