NSS Exploring Economics 1 (3rd Edition)

Revision Notes

Chapter 5 Price elasticity of demand and supply

Price elasticity of demand

Percentage change in quantity demanded (%∆Qd)

1. Price elasticity of demand (Ed) =
Percentage change in price (%∆P)

2. Calculation of Ed by the average price and quantity method:

Qd2 – Qd1
× 100%
(Qd1 + Qd2)/2
Ed =
P2 – P1
× 100%
(P1 + P2)/2

3. According to its elasticity, demand can be classified into five types:

a. Perfectly inelastic demand (Ed = 0)
b. Inelastic demand (0 < Ed < 1)
c. Unitarily elastic demand (Ed = 1)
d. Elastic demand (1 < Ed < ∞)
e. Perfectly elastic demand (Ed = ∞)

Price elasticity of demand and total revenue

4. Total revenue (TR) = Price × Quantity transacted

5. The following table summarises the relationship between Ed and TR when price changes.

When price increases When price decreases

Elastic demand %  P < %  Qd %  P < %  Qd
1 < Ed < ∞  Gain < Loss  Loss < Gain
 TR   TR 
Price Price
Gain in TR Gain in TR
P2 P1
Loss in TR Loss in TR
P1 P2

D D
0 Q2 Q1 Quantity 0 Q1 Q2 Quantity

NSS Exploring Economics 1 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 5)
 When price increases When price decreases
Inelastic demand %  P > %  Qd %  P > %  Qd
0 < Ed < 1  Gain > Loss  Loss > Gain
 TR   TR 
Price Price
Gain in TR Gain in TR

Loss in TR Loss in TR

P2 P1
P1 P2
D D
0 Q2 Q1 Quantity 0 Q1 Q2 Quantity

Unitarily elastic %  P = %  Qd %  P = %  Qd
demand  Gain = Loss  Loss = Gain
Ed = 1  TR remains unchanged  TR remains unchanged

Price Price
Gain in TR Gain in TR
Loss in TR Loss in TR
P2 P1

P1 P2
D D
0 Q2 Q1 Quantity 0 Q1 Q2 Quantity

6. If a consumer spends a fixed amount of money on a good regardless of the price, he has
unitarily elastic demand for the good.

Factors affecting price elasticity of demand

7. a. Price range   Ed 
Along a downward sloping linear demand curve:
Price

Ed > 1 (Elastic)
Midpoint Ed = 1 (Unitarily elastic)

Ed < 1 (Inelastic)

D Quantity
0

NSS Exploring Economics 1 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 5)
 b. Number and closeness of substitutes   Ed 
c. Degree of necessity   Ed 
d. Habit of consuming a good  Ed 
e. Proportion of expenditure to income   Ed 
f. Number of uses   Ed 
g. Time available to adjust consumption   Ed 
h. Durability   Ed 

Price elasticity of supply

Percentage change in quantity supplied (%∆QS)
8. Price elasticity of supply (ES) =
Percentage change in price (%∆P)

9. Calculation of ES by the average price and quantity method:

QS2 – QS1
× 100%
(QS1 + QS2)/2
ES =
P2 – P1
× 100%
(P1 + P2)/2

10. According to its elasticity, supply can be classified into five types:
a. Perfectly inelastic supply (ES = 0) d. Elastic supply (1 < ES < ∞)
b. Inelastic supply (0 < ES < 1) e. Perfectly elastic supply (ES = ∞)
c. Unitarily elastic supply (ES = 1)

Factors affecting price elasticity of supply

11.
a. Fixed available amounts of goods b. Ease of adjusting factors of production   ES 
or fixed capacities  ES = 0 c. Factor mobility   ES 
Price d. Reserve capacity   ES 
S e. Time allowed to adjust production   ES 
f. Ease of entry for new firms   ES 

0 Quantity

NSS Exploring Economics 1 (3rd Edition) 3 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 5)