Elasticity:-

% change∈Quantity demanded
Price Elasticity of Demand =% change∈Price

How to calculate % change

Income 5000 taka, now 6000 taka. What is the % change?
New −Old
Normal method= x 100
Old

Answer the following questions on the basis of the following table? Explain the
value of the price elasticity of demand.
Poin Price Quantity Demand
t
A 10 200
B 15 150
a) Calculate price elasticity of Demand using normal method when price moves
from point A to Point B?
b) Calculate price elasticity of Demand using normal method when price moves
from point B to Point A?
c) Calculate price elasticity of Demand using Mid-point method when price moves
from point A to Point B?
d) Calculate price elasticity of Demand using Mid-point method when price moves
from point B to Point A?
150−200
x 100
200
a) Price elasticity demand A to B = 15−10 = - 0.5
x 100
10

200−150
x 100
150
b) Price elasticity demand B to A = 1 0−15 =-1
x 100
15

To avoid this problem, we can use mid-point method

New−Old
Mid-point method= Mid− point x 100
 150−200
x 100
175
c) Price elasticity demand A to B = 15−10 = - 0.71
x 100
12.5
200−150
x 100
1 75
d) Price elasticity demand B to A = 10−15 = - 0.71
x 100
12.5

So, the benefit of mid-point is, whatever the direction you are taking, in both cases
it will give us the same result.
Determinants of Price elasticity of demand
1. Availability of close substitute
Wheat price increase, Qd wheat decrease a lot because of close substitute.
Egg Price increase, Qd will decrease slightly, its inelastic
N.B: More the substitute good, more elastic
2. Necessity VS Luxury
Medicine Price, Qd decrease slightly, its inelastic
Car price, Qd decrease a lot, its elastic
N.B: necessary good will be more inelastic and luxury good will be elastic
3. Definition of the market
Broadly or narrowly
Food- broadly, banana-narrowly
More inelastic if we define the market broadly and more elastic if the define the
market narrowly.
4. Time horizon
Short run or long run
Oil price, bus ticket price increase,
In short run, the good will be inelastic but in the long people adjust and it become
elastic.
Variety of Price elasticity:
1. Perfectly inelastic demand
2. inelastic demand
3. Unit elastic demand
4. elastic demand
5. Perfectly elastic demand
% change∈Quantity demanded 10 %
Price Elasticity of Demand = = = 1= Unit elastic
% change∈ Price 10 %
% change∈Quantity demanded 9 %
Price Elasticity of Demand = = = <1= Inelastic
% change∈ Price 10 %
% change∈Quantity demanded 11%
Price Elasticity of Demand = = =>1= Elastic
% change∈ Price 10 %
% change∈Quantity demanded 0 %
Price Elasticity of Demand = = =0= Perfectly Inelastic
% change∈ Price 10 %
% change∈Quantity demanded 10 %
Price Elasticity of Demand = = = infinity = Perfectly elastic
% change∈ Price 0%
demand
Total revenue and Price elasticity of demand:
TR= P xQ

Recap:
1.What is Price elasticity of demand?
2. What are the determinants of price elasticity of demand?
3. Calculation of Price elasticity of demand
4. Variety of elasticity of demand
5. Total revenue and price elasticity of demand
Income elasticity of demand:
% change∈Quantity demanded
Income Elasticity of Demand =
% change∈ Income
If the value of income elasticity of demand is positive, the good will be normal and if the value is
negative the good will be inferior.

Cross Price elasticity of demand:

% change∈Quantity demanded good A
Cross Price Elasticity of Demand =
% change∈Price of Good B
Substitute good: Coke Price Increase, pepsi Qd increase= + relationship
Complementary good: Tea Price increase and sugar Qd decrease= - relationship

The cross price elasticity of demand for good X and Y is 0.37, the good is

Price elasticity of Supply:

% change∈Quantity supplie d
Price elasticity of supply =
% change∈Price

Determinants of Price elasticity of supply:

1. Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
2. Time period.
Supply is more elastic in the long run.