At equilibrium, Qd=Qs

100-2p=50+5p
7p=50
Pe=7.143=7,143
Qe=100-2(7.143)=85.714=85,714

6500 ceiling
Qd=100-2(6.5) =87,000
Qs=50+5(6.5) =82,500
There will be a Shortage of 4,500 houses.
Price decontrol
Chapter 3: Elasticity of demand and supply
Elasticity of demand
This refers to the degree of responsiveness of the quantity
demanded as a result of a change in a determinant.
Types of elasticity of demand
 Price elasticity of demand (P.E.D)
 Income elasticity of demand (Y.E.D)
 Cross elasticity of demand (C.E.D)
Price elasticity of demand (P.E.D)
This refers to the degree of responsiveness of the quantity
demanded as a result of a change in price.

%∆ 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃. 𝐸. 𝐷 =
%∆ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Example
P 10 15
Q 30 20
20 − 30
%∆ 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = 𝑥 100
30
−10
= 𝑥100 = −33.33%
30
15 − 10 5
%∆ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 = 𝑥100 = 𝑥100 = 50%
10 10
%∆ 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 33.33
𝑃. 𝐸. 𝐷 = =− = −0.67
%∆ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 50
 %∆ 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃. 𝐸. 𝐷 =
%∆ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
∆𝑄 ∆𝑃
𝑃. 𝐸. 𝐷 = × 100 ÷ 𝑋100
𝑄 𝑃
∆𝑄 𝑃 1
𝑃. 𝐸. 𝐷 = × 100 × 𝑋
𝑄 ∆𝑃 100
∆𝑄 𝑃
𝑃. 𝐸. 𝐷 = ×
𝑄 ∆𝑃
∆𝑸 𝑷
𝑷. 𝑬. 𝑫 = ×
∆𝑷 𝑸
Example
P 10 15
Q 30 20
20 − 30
%∆ 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = 𝑥 100
30
−10
= 𝑥100 = −33.33%
30
15 − 10 5
%∆ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 = 𝑥100 = 𝑥100 = 50%
10 10
%∆ 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 33.33
𝑃. 𝐸. 𝐷 = =− = −0.67
%∆ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 50
= 0.67
Alternatively;
∆𝑄 𝑃 20 − 30 10 10 10
𝑷. 𝑬. 𝑫 = × = 𝑋 =− 𝑋 = −0.67
∆𝑃 𝑄 15 − 10 30 5 30
= 0.67
The P.E.D can be at a point or arc
Point elasticity of demand
This is the P.E.D at a particular point along the demand curve.
The formula for point elasticity is:
 ∆𝑄 𝑃
𝑷. 𝑬. 𝑫 = ×
∆𝑃 𝑄

Arc elasticity/mid-point elasticity

This is the P.E.D over an interval along the demand curve.
The formula for arc elasticity is:
𝑃1 + 𝑃2
∆𝑄 2
𝑨𝑹𝑪 = ×
∆𝑃 𝑄1 + 𝑄2
2
August 2009 Q1
P 10 9 8 7 6 5 4 3
Q 400 500 600 700 800 900 1000 1100

i)
Price 9 8
Quantity 500 600
𝑃1 + 𝑃2
∆𝑄 2
𝑨𝒓𝒄 = ×
∆𝑃 𝑄1 + 𝑄2
2
600 − 500 8.5
𝐴𝑟𝑐 = 𝑋
8−9 550
100 8.5
𝐴𝑟𝑐 = 𝑥 = −1.545 = 1.545
−1 550
ii)
Price 6 7
Quantity 800 700

∆𝑄 𝑃
𝑷𝒐𝒊𝒏𝒕 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 = ×
∆𝑃 𝑄
 700 − 800 6 100 6
𝑃𝑜𝑖𝑛𝑡 = 𝑥 =− 𝑥 = −0.75 = 0.75
7−6 800 1 800
N/B The P.E.D is always negative. The sign is an indication of
the negative slope of the demand curve. It is therefore ignored.

More examples from the question bank

May 2014 Q1 (Page 21)
𝑄 = 100 − 5𝑃
𝑤ℎ𝑒𝑛 𝑃 = 10, 𝑄 = 100 − 5(10) = 50
𝜕𝑄 𝑃
𝑷𝒐𝒊𝒏𝒕 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 = ×
𝜕𝑃 𝑄
𝑄 = 100 − 5𝑃1
𝜕𝑄
= 1(−5𝑃1−1 ) = −5𝑃0 = −5
𝜕𝑃
𝜕𝑄 𝑃 10
𝑷𝒐𝒊𝒏𝒕 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 = × = −5 𝑥 = −1 = 1
𝜕𝑃 𝑄 50
May 2018 Q3a page 3
𝑄 = 200 + 5𝑃 + 𝑃−2

𝑊ℎ𝑒𝑛 𝑃 = 20, 𝑄 = 200 + 5(20) + 20−2 = 300.0025

𝜕𝑄 𝑃
𝑷𝒐𝒊𝒏𝒕 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 = ×
𝜕𝑃 𝑄
 𝑄 = 200 + 5𝑃1 + 𝑃−2
𝜕𝑄
= 1(5𝑃1−1 ) − 2(𝑃−2−1 )
𝜕𝑃
𝜕𝑄
= 5 − 2𝑃−3 = 4.99975
𝜕𝑃

𝜕𝑄 𝑃
𝑷𝒐𝒊𝒏𝒕 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 = ×
𝜕𝑃 𝑄
20
𝑃𝑜𝑖𝑛𝑡 = 4.99975 𝑋 = −0.33 = 0.33
300.0025