Price Elasticity of Demand

P Qd
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒅
Elasticity = 4 120 A
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷

6 80 B

Elasticity changes when we change the order of calculation

Prepared by Tuhinur Rahman Chowdhury 1

Elasticity using Mid Point Formula

P Qd

4 120 A

6 80 B

Prepared by Tuhinur Rahman Chowdhury 2

 Elasticity from Demand Curve

• The flatter the demand curve that passes through a given point, the greater the price elasticity of demand.
The steeper the demand curve that passes through a given point, the smaller the price elasticity of demand.

• At points with a low price and high quantity, the demand curve is inelastic. At points with a high price and low
quantity, the demand curve is elastic

Prepared by Tuhinur Rahman Chowdhury 3

 Total Revenue & Price Elasticity of Demand
Total Revenue
• the amount paid by buyers and received by sellers of a good, computed as the price of the good times the
quantity sold
• TR = P.Q
P Q

4 100

TR 400

Prepared by Tuhinur Rahman Chowdhury 4

 Change in Revenue with Elasticities

 When demand is inelastic (a price elasticity less than 1), price and total revenue move in the same direction: If
the price increases, total revenue also increases

 When demand is elastic (a price elasticity greater than 1), price and total revenue move in opposite directions: If
the price increases, total revenue decreases

 If demand is unit elastic (a price elasticity exactly equal to 1), total revenue remains constant when the price
changes.

Prepared by Tuhinur Rahman Chowdhury 5

Elasticity and Total Revenue along a Linear Demand Curve

Prepared by Tuhinur Rahman Chowdhury 6

 TR = P.Q =

Elasticity = -------------- =

TR = P.Q =

Prepared by Tuhinur Rahman Chowdhury 7

Elasticity and Total Revenue along a Linear Demand Curve

Prepared by Tuhinur Rahman Chowdhury 8

 The Elasticity of Supply

The price elasticity of supply measures how much the quantity supplied responds to changes in the price.

% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒔𝒖𝒑𝒑𝒍𝒊𝒆𝒅

Price Elasticity of Supply Elasticity =
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒔
Price Elasticity of Supply Elasticity =
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷

Prepared by Tuhinur Rahman Chowdhury 9

 The Price Elasticity of Supply

Quantity
Price (P) Point
Supplied (Qs)

1 5 A

2 10 B

Prepared by Tuhinur Rahman Chowdhury 10

Perfectly Inelastic Supply

Es = 0

Prepared by Tuhinur Rahman Chowdhury 11

 Inelastic Supply

Es < 1

Prepared by Tuhinur Rahman Chowdhury 12

 Unit Elastic Supply

Es = 1

Prepared by Tuhinur Rahman Chowdhury 13

 Elastic Supply

Es > 1

Prepared by Tuhinur Rahman Chowdhury 14

Perfectly Elastic Supply

Es = Infinity

Prepared by Tuhinur Rahman Chowdhury 15